2022 brought the market a raft of surprises, but one thing seems certain: Energy stocks had a great year – although it remains to be seen whether they’ll deliver an encore. Here’s what analysts say and which stocks to watch.
Oil Stocks Will Weather the Volatility
Oil prices have held steady at around $90 per barrel this November, yet Citi now forecasts higher prices for the next few quarters. Some braver options traders are even betting crude could hit $200 by March 2023, due in no small part to European sanctions against Russia.
Of course, these geopolitical currents are nothing new – we’re just seeing their broader effects. Oil stocks have been rare winners in an otherwise dismal year for equities, with the S&P 500’s energy sector up 70%. Wall Street analysts recommend Diamondback Energy, ConocoPhillips, and EOG Resources as some of the best oil stocks to buy now due to their strong balance sheets, consistent dividend growth, and above-industry returns.
In all, oil price trends make oil stocks profitable investments with high YTD returns – so invest by buying individual stocks or mutual funds/ETFs via online broker apps after researching the companies.
The Energy Sector in Demand
It’s not just individual investors who are sounding the call, either. BlackRock is expecting healthcare and energy stocks to benefit from global growth in 2023, as well as short-term government bonds and investment-grade credit – setting the stage for a new regime of market volatility following some four decades of moderation.
Analysts are also careful to note that the time to strike won’t last forever. Energy stocks outperformed expectations this year, spurred on by a slow-but-steady rise in oil prices, yet the next calendar year is shaping up for lower earnings.
Investors considering the sector ought to mind their long-term time horizon and consider which large-cap companies provide superior free cash flow returns before committing their precious funds. As long as they keep a cool head (even amidst the current slump in energy prices) investors can still benefit from buying oil stocks. MEG Energy (TSX: MEG) and Baytex Energy (TSX: BTE) are two Canadian companies that have performed well despite turbulent market conditions – partially thanks to their efficient operations and high-quality reserves projects. Their 2022 growth has been impressive: Adjusted funds flow more than doubled for MEG while Baytex slashed its net debt by 21%.
With expected free cash flows of $125 million for Q4, both Baytex and MEG offer great value given their discounted price-to-earnings multiples at 3x and 6x respectively. In light of a possible oil price rebound next year, either stock could be a solid bet for gaining energy sector exposure.
Rounding Things Out
Still fretting about all the uncertainty? Look to small-cap buys. Clearfield, a telecom company that was on its deathbed in 2008 is a great example.
Clearfield turned over a new leaf with the appointment of CEO Cherie Beranek. She refocused on “community broadband,” and took advantage of stimulus funds to establish her company among the pandemic-era’s biggest winners with its stock up 10x since March 2020!
Dividend stocks like Qualcomm and NextEra Energy offer strong growth, while energy and utilities provide a hedge against inflation. For instance, Mike Morey, fund manager at Integrity Viking Funds, favours these sectors plus healthcare and communication services.
Building a Better Portfolio
So what’s the bottom line? Investing in the energy sector offers investors the opportunity to benefit from share price appreciation and growing dividends over time.
At the same time, commodity cycles can set traditional energy assets to reeling, making them hazardous if companies don’t evolve towards renewable energies – research into potential investments is key. Seeking balance with small-cap and dividend stocks might be the answer.
Alpesh Patel OBE
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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.