The Canadian energy patch is having a good start to the year, even as the TSX Index flirts with a correction. Undoubtedly, this isn’t the first time that the commodities and energy plays have shone as most everything else takes a bit of a hit to the chin.
With the crisis in Iran, the price of oil has really taken off and while it’s really hard to tell where prices are going to settle in the coming weeks and months, I do think that if the situation gets worse or stays the same (think a blocked Strait of Hormuz), the damage could really start as inflation weighs more heavily on the consumer and input prices for various firms.
Even if you haven’t felt the price hikes at the gas station (let’s say you drive electric or don’t own a car), higher energy prices could reflect in inflation in the price of food (which is already way too hot, by the way) and numerous other goods.
Any way you look at it, there’s a lot of risk on the table, but, at the same time, a resolution to the crisis could happen at any time, and if it’s in the cards sooner (let’s say in the next few weeks) rather than later (say it drags into the spring months), perhaps oil could pullback and stagflation fears and the potential for rate hikes could go away.
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Cenovus Energy stock has been a great diversifier
It’s an unpredictable time, to say the least. Energy titans, like Cenovus Energy (TSX:CVE), remain one of the few pillars of stability in the market. Of course, just about any energy play seems like a wise hedge at a time like this.
Of course, it would have been far better to own shares before the latest spike in oil prices. But even if prices were to correct (I don’t think the producers are priced with US$90–100 WTI in mind, at least not yet), I view the premier oil plays as vital hedges against any potential future conflicts.
Indeed, higher energy prices could spell bad news for most portfolios and budgets. And that’s why holding onto the energy names might be the ultimate diversification strategy. This isn’t the first time oil spiked, and it probably won’t be the last. Either way, Cenoevus stock warrants a second look, even as it goes parabolic, up more than 45% year to date.
Shares are hot, but still cheap!
Despite the sudden rise, shares of CVE are still incredibly cheap at 16.29 times trailing price-to-earnings (P/E) or around 1.1 times price-to-sales (P/S). Given the impressive rise in production, the aggressive debt payback, surging cash flows, and an incredibly generous shareholder return policy, I’d not ignore the name just because shares are starting to get overheated.
If anything, a strong case could be made that Cenovus is the growthy play of the large-cap energy juggernauts. And until that changes, the 2.4%-yielding stock stands out as a worthy portfolio diversifier that will pay you quite well to wait.
