The high-flying tech sector gets all of the attention, but I am often reminded of a quote from the legendary investor Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die of euphoria.”
If there’s an area of the market that has more pessimism surrounding it than the energy sector, it would be though to find. And for good reason. Already under attack from climate concerns and environmental activism and reeling from discord among some oil producing nations, the group was pummeled by concerns surrounding the COVID pandemic.
The energy sector is down 31% in the last six months, which is far and away the worst performing group over that time span.
But as Templeton and many other famous investors remind us, there are opportunities to be found in the pessimism. It will take some patience, but we’ve found three stocks in the energy sector that provide that chance — Chevron (CVX), ConocoPhillips (COP) and EOG Resources (EOG).
First, let’s establish that energy isn’t dead. Despite those that posit that climate change concerns will kill energy production as we know it — that seems unlikely.
The world still needs energy, and even most of the so-called “green” energy sources require some sort of assistance from traditional sources. Where does the power come from for electric cars to recharge?
Additionally, to think that major companies like the three mentioned won’t adapt to the changing environment is ridiculous. These companies have huge budgets and research departments and are likely to be at the cutting edge of environmental innovations that actually work and are sustainable.
So why these three? All are fairly large companies with proven reserves and the ability to withstand some near-term headwinds. All three continue to pay dividends, which are becoming more attractive in this low-yield world.
CVX offers a 5%+ yield, while COP and EOG are around 4% and 3%, respectively. And COP offers an additional advantage in that they just announced a disappointing 2nd quarter, which provides shares at an even more attractive price.
EOG Resources has proven reserves around the world, is involved in both oil and natural gas, and is undertaking a pollution reduction program. The price-to-earnings ratio is only 13 and you are getting over 3% in yield for being patient.
The 52-week range has been $27 to 89, with the current price of around $47 falling toward the lower end — indicating to me that upside has been seen and continues to be possible.
Patience pays
ConocoPhillips is a name almost everyone will recognize and with a good asset base and solid balance sheet, having reduced their debt load over the past four year and temporarily reducing their CAPEX spend, should be able to well withstand the current tumult.
With a 4%+ dividend, investors can be paid for their patience.
Likewise, Chevron is a major player in the energy industry and is well diversified with both up and downstream businesses. Again, a solid balance sheet and experience weathering previous storms should allow Chevron to handle this one as well, and a 5.7% yield is a nice carrot.
To buy low and sell high, which should be the goal of every investor, sometimes you have to buy low — and that means when it doesn’t “feel good.”
It likely won’t feel good to invest in these names at the present time, but I believe patience will be rewarded!
