The energy sector has been home to some massive performers this year, and while value hunters might be wary of the momentum behind some of the names, most notably the producers that have gained the most on the recent surge in oil prices, I still think there are reasons to give the names a second look while they’re running high.
Of course, chasing momentum can lead to quick, hefty losses if you get the timing wrong. That said, if you’re in it for the long run, I must say that the valuations (at least for the most part) still don’t reflect the possibility that oil prices stay elevated for a while longer. Now, I have no idea how long the Strait of Hormuz is going to remain stuck.
Really, nobody else does either. All investors can do is be ready for whatever the energy market throws at them next. Whether that’s oil prices at well over US$115 per barrel through summer and maybe even into the fall or a dip slightly below US$100, I do think that energy stocks aren’t all that bad a deal right here, even if you’re a reluctant buyer on strength.
In any case, preparing for volatility (remember that volatility works on the way up as well) seems like a prudent move, especially as energy-driven inflation looks to become a top story.
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Canadian Natural Resources
In terms of value for money, I think it’s tough to look past shares of Canadian Natural Resources (TSX:CNQ), especially while they’re going for just 13.2 times trailing price-to-earnings (P/E), with a nice 3.7% yield on a dividend that’s poised to grow at a rapid rate in the coming years as higher oil leads to greater cash flows. Canadian Natural and its peers seem to be in good shape, even as the rest of the TSX Index looks to stall out a bit.
With a good amount of share price appreciation, a still very modest multiple, and enough financial flexibility to go for big buybacks as well as dividend hikes, I wouldn’t shy away from the name right here, even though a pullback will probably be in the cards at some point. Either way, CNQ stock might be a good way to play the scary scenario wherein the Strait of Hormuz stays blocked for longer. It’s hard to tell just how high oil prices can go. And, with that, new investors should carefully evaluate the full extent of the risks.
Even if CNQ stock is overbought and overdue for a dip, I’d still not be afraid to nibble at more than $68 per share. Perhaps expecting a correction to hit after you’ve bought is the best way to approach such a high-flyer, especially if you expect the oil shock to be the theme for the rest of the year.
Here’s when I’d buy the stock
Personally, I’m waiting for a correction before jumping in and building a position that I think would be best held for at least 10 years.
As shares cool and markets become a bit more hopeful that the conflict in the Middle East resolves in a matter of weeks rather than months, perhaps hard-hit stocks might have what it takes to recover while the heated oil plays take a bit of a breather. They have earned a bit of time off, after all.
