Energy stocks represent partial ownership in companies that supply electricity and fuel for the global economy. The energy sector in Canada is vast, comprising a large portion of the TSX. Energy stocks include:
Electric utility companies
Liquefied natural gas companies
Natural gas companies
Renewable energy companies
Solar energy companies
How can you pick energy stocks?
1. Look for companies with a promising future
It’s no surprise that the energy sector is under intense scrutiny. With climate change at the front of many people’s minds (from governments to investors), energy companies, old and new, are constantly adapting to a new world. Many people want cleaner energy. And it’s the energy sector’s challenge to make clean energy available — and profitable, too.
For that reason, investors will do well to look for innovative companies that are actively solving contemporary energy problems. Though we’re not suggesting investors ignore bigger companies in oil or natural gas, we are suggesting you keep an eye on the future as you’re picking your energy stocks.
Given the direction the world is going, ask yourself: who will be around in 20, 30, or even 40 years? That’s one of the biggest questions you can answer as an energy stock investor.
2. Analyze an energy company’s financial standing
The future of an energy company depends in part on how it’s handling its finances now. Given that prices within the energy sector are extremely volatile — just look at how the price of gas fluctuates — you want to be sure an energy company has the financial strength to withstand a recession. Some factors you may want to analyze include:
Strong balance sheet: the company should have lots of liquid cash on hand, as well as a capacity to borrow (if needed). It should also have low amounts of debt and a high investment grade.
Low production costs: the company shouldn’t be spending the majority of its revenue on producing energy. The company should have a stable revenue with minimal exposure to price fluctuations.
Conservative dividend payout ratio: though everyone likes to make money on dividends, if a company dishes too much out, it could end up cutting or reducing its dividend program during hard times.
3. Check here for our writer’s picks
Our writers are constantly analyzing the energy sector, as they look for stocks that are growing, as well as those that are under- or over- valued. Keep checking back here to see which stocks they recommend — and which they don’t.