It’s not that hard to spot value in today’s market, even with the TSX Index and S&P 500 just a good day or so away from hitting brand-new all-time highs. Indeed, mega-cap tech and AI stocks have been leading the latest rebound in the U.S. stock market.
Not really a surprise. On the TSX Index, the big banks have continued to do the heavy lifting. More recently, though, the energy names have begun to take several backward steps as oil plunged over hopes that Iran and the U.S. can reach some kind of peace deal.
Of course, it was quite unrealistic to expect the price of oil to stay above US$100 per barrel in the long run. And while the conflict in the Middle East might last longer, I still think that the negativity surrounding energy names could lead to an opportunity for contrarians to buy the dip. Indeed, energy stocks boom fast at the first signs of a shock. But they can also plunge just as fast as geopolitical conflicts look to resolve.
Markets are forward-looking, and right now, there’s this sense of optimism that things will get better from here, perhaps in a timely manner. Of course, if the market is wrong, it can correct this, as many investors probably already know well.
While energy stocks may have peaked out for the year, I still think that a dividend heavyweight with powerful operating economics is still worth careful consideration, especially now that investors are bracing for a further dip in the price of oil.
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Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) is a fantastic blue-chip that’s down around 12% from its peak. Indeed, the first-quarter round of results came in, and while production rose, investors still didn’t seem all too enthused, with shares tumbling just over 2% on the day of the report. The debt load is coming down, which is always a good sign.
Production marched higher a bit, and operating efficiencies continue to be enviable. With ample free cash flow flowing in to help power share buybacks and more dividend raises, I see no reason to ditch shares after such a decent quarterly showing.
If you ask me, it’s an emotionally-driven slide that dip-buyers should circle around!
Of course, there’s a lot of negative momentum behind the name right now, and with the latest fall in oil prices, perhaps it’s more emotion than anything else that’s dictating the trajectory of the stock. For long-term investors willing to catch the name as it comes in, I think there’s a lot of value to be had.
Sure, the stock is still up close to 30% year to date, so the latest correction isn’t quite as jarring. Still, when you consider the swelling free cash flow and how smoothly things are going with production, I think the name is becoming too good a deal to pass up, even if you think the brutal technicals will drive shares even lower over the short term.
At less than 12.0 times trailing price to earnings with a 4.02% yield, and, most importantly, a slightly lower beta than the market (0.91), and certainly to the tech and AI trade, I find CNQ stock to be a must-watch on the way down. And if you’re willing to average down, perhaps $60 could be a spot to initiate a small starter position. In short, incredible fundamentals, nasty technicals.
