Energy investors have been running for cover as the demand erosion caused by efforts to stem the spread of the coronavirus continue to whipsaw stocks and futures. The price of WTI oil fell below $30, $20, $10 and even went negative for a while. Remember, the commodity started the year at around $60 a barrel. This led analysts to sharply reduce their forecasts for the oil sector components. Investors got spooked too, and responded with a broad sell off in equity.
While oil prices have come a long way since the depths of minus $38 a barrel in April to around $40 now, lingering signs of demand weakness are still evident. As long as the coronavirus outbreak continues unabated (as is now the case in India and across Europe which is fighting the second wave), there will be pressure on the demand side of the equation.
How to Invest in Energy?
The resurgence of coronavirus cases in a number of countries that is stalling an economic recovery and the ongoing weakness in the aviation sector could still push the commodity to the depths of multiyear lows. However, signs are emerging that oil prices are likely to stabilize and gradually pick up. Not only is the OPEC+ group continuing to curb output in an attempt to tackle a global supply glut and keep prices afloat, energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production and supply/demand rebalancing.
However, not all oil stocks are the same. In fact, one needs to have an appetite for risk in order to invest in the energy sector. For savvy investors though, there are opportunities to earn big returns.
Focus on Value Stocks
Given this uncertainty, it will be wise for investors to apportion their funds in value stocks. Value investing has always been a popular strategy, and with good reason too. Historical data suggests that value stocks not only tend to outperform growth stocks but are relatively less volatile compared to them.
Specifically, for investors who are risk-averse, value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by most, and are thus trading at cheap multiples.
To benefit even more, one might focus on the small-cap universe as opposed to the mid-cap and large-cap stocks.
Why Small Caps?
Owing to their significant growth potential, small-cap stocks (stocks with a market cap of around $1 billion or below) usually tend to outperform their large-cap peers over time. Lest we forget, majority of today’s large-cap entities were once small businesses and retail investors who took the plunge early have managed to reap massive gains over the years. In fact, some of these lesser known stocks could turn out to be the next multibagger.
At the same time, the small-cap stocks are considered to be highly volatile and therefore riskier than well-known large-cap companies. Nonetheless, the growth potential of small-caps given the current backdrop of their relative insularity to the coronavirus-forced global supply chain disruptions, Fed’s upbeat U.S. economic outlook and strength in the U.S. dollar, appears attractive.
As it is, in the due course of the energy sector’s horrid run year to date, several mid-cap companies (market capital > $1 billion but < $10 billion) with strong fundamentals have become small caps (market capital < $1 billion).
We believe investing in small-cap value stocks could actually be a safer bet as these stocks generally yield high returns and generate exponential gains over time. Moreover, taking into account that such stocks are far more volatile in nature, they possess far higher potential for price appreciation.
However, most of these players are generally not industry giants and hence, a little extra effort must be put in to select the correct stocks. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.
The Zacks Rank is a reliable tool that helps you trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education.
Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best opportunities in the value investing space.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Laredo Petroleum, Inc. LPI: This Permian Basin-focused upstream operator currently carries a Zacks Rank #1 and a Value Score of A. Laredo Petroleum, with a market cap of around $129 million, banks on its oily, high-margin inventory of assets to tide through the difficult operating environment.
Helix Energy Solutions Group, Inc. HLX: A provider of offshore energy services, the #2 Ranked company has a Value Score of A. Helix Energy Solutions focuses on the entire oil and gas value chain special focus on well intervention and robotics operations. The company’s current market cap is roughly $420 million.
Crescent Point Energy Corp. CPG: This Calgary-based company, whose operations are primarily concentrated in southwest and southeast Saskatchewan, carries a Zacks Rank #2 and a Value Score of A. Crescent Point, with a market cap of nearly $704 million, counts operational excellence and prudent cost management as its strength.
CrossAmerica Partners LP CAPL: It is a wholesale distributor of motor fuels a Zacks Rank #2 and a Value Score of B. The partnership’s strong margins and robust financial position are expected to help it counter the coronavirus-related headwinds.
Precision Drilling Corporation PDS: This company — Canada’s largest drilling rig contractor — has a Zacks Rank #2 and a Value Score of A. Precision Drilling’s prudent cost management and technological leadership are its main growth drivers. The company’s current market cap is just over $175 million.
5 Stocks Set to Double
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Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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Precision Drilling Corporation (PDS): Free Stock Analysis Report
Crescent Point Energy Corporation (CPG): Free Stock Analysis Report
CrossAmerica Partners LP (CAPL): Free Stock Analysis Report
Laredo Petroleum, Inc. (LPI): Free Stock Analysis Report
Helix Energy Solutions Group, Inc. (HLX): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.