An old investing adage is one of the simplest and the best: Buy good companies when they’re cheap. This has been a highly successful strategy over time.
However, nobody told that to the current market. Cheap stocks are not getting snatched up. Instead, investors have been flocking to those stocks that are already working. Top-performing sectors are largely remaining on top while sectors like Energy and Healthcare continue to languish, despite low prices.
Current market behavior could last a while. But it will change eventually. It always does.
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The most neglected sector by far is Energy, where cheap energy stocks now abound. How bad is it? Energy is the worst-performing sector of the market over the last 10 years, five years, three years, one year, year-to-date and three months. That’s some abysmal performance.
Much of it has to do with the oil price crash between 2014 and 2016 and the ensuing industry carnage. The price of oil fell from over $110 per barrel in the spring of 2014 to under $40 by the beginning of 2016, as additional U.S. supply amidst the energy boom combined with a slowing global economy to produce a glut.
Prices recovered to over $70 per barrel by the summer of 2018 but have again floundered to the current $58 level amid fears of a slowing global economy. Most energy stocks have still not recovered from the 2014-to-2016 price crash. But not all energy companies are exposed to volatile commodity prices and others are well diversified. While the earnings of several companies have recovered, the stock prices still haven’t.
Eventually, these underpriced stocks will come back into favor. No sector is in the doghouse forever, especially one that has many companies with soaring earnings amid the U.S. energy boom. But who wants to sit on a stock for a year or more while it continues to languish?
Fortunately, I found three cheap energy stocks that are not only positioned to soar when the sector comes back into favor, but are already working. These stocks have not only vastly outperformed the energy sector indexes but have performed better or on par with the overall market. They are thriving while the rest of the sector suffers. These stocks are all well worth considering for both current and future performance as well as their high dividend yields.
3 Cheap Energy Stocks to Buy Now
Cheap Energy Stock #1: Cheniere Energy Partners (CQP)
A huge new market in American natural gas exports is just now developing. U.S. natural gas production exploded during the energy boom and there was more of the stuff than we could use. We couldn’t export it because we didn’t have the huge fractionalization facilities necessary to convert it to natural gas liquid (NGL) and ship our cheap gas overseas were it fetches much higher prices, until now. Cheniere Energy Partners is an MLP that operates Sabine Pass, this country’s first natural gas export facility.
Other facilities will also come on line in the years ahead, but Cheniere was the first to the party. The partnership has secured long-term delivery contracts that should provide a stable income for the long haul. Earnings have exploded as export volumes continue to soar. It also has more capacity coming on line next year. Earnings are expected to grow 45% per year over the next five years.
Revenues have soared over the last three years but the stock still sells at a price/earnings multiple below that of the overall market and currently pays a 5.5% yield.
Cheap Energy Stock #2: Enterprise Product Partners (EPD)
Enterprise in one of the largest midstream energy companies in the country with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico.
U.S. oil and gas production is at all-time record levels. EPD has little exposure to commodity prices but instead collects fees for the transport and storage of all this oil and gas sloshing around the country. And business is booming.
An estimated $44 billion per year will need to be spent on energy infrastructure to accommodate the new supply through 2035. Opportunities for growth abound. EPD has $5 billion in projects under construction and between $5 and $10 billion in development. That should provide ample growth to go with the 6% yield.
It’s worth noting that this is one of the best energy companies in the business. It has a pristine balance sheet with investment grade ratings and only a 60% ratio that enables the company to reinvest earnings in new and existing projects at a lower cost basis than its peers. It has also raised the dividend for 60 straight quarters and has a phenomenal track record of performance over the last 20 years.
Despite the fact that earnings have grown by an average of 11% per year over the last five years, the stock is still 30% below the 2014 high.
Cheap Energy Stock #3: Chevron (CVX)
Chevron is one of the world’s largest integrated oil and gas companies with operations throughout the world. The company is involved in virtually every facet of the energy industry but revenue is heavily skewed toward exploration and production of oil and gas.
Unlike the previous two cheap energy stocks, Chevron does have exposure to oil and gas prices. However, even in a year in which oil prices fell more than 20%, CVX significantly outperformed the energy index and delivered results on par with the overall market.
It made up for the price slippage with peer-leading production growth as new projects come on line. It also has lower costs and higher margins than the other large integrated energy companies. Chevron’s cost per dollar of BOE produced has fallen from $18 in 2014 to under $10 today.
Think of it this way: If CVX can produce double-digit returns in a year when commodity prices fall significantly and when it is part of the worst-performing market sector, it could do very well if things turn around or even stay the same.
In addition to new projects coming on line this year and next, I particularly like the company’s exposure to the U.S. energy boom. Chevron has a huge and growing presence in the Permian Basin, the largest shale oil producing region in the United States and, by far, the fastest growing oil region in the world.
The stock is cheap here. Despite solid earnings growth it is still below its 2014 highs and selling at valuations well below the five-year averages and is paying over a 5% yield.
For those reasons, CVX is one of my favorite cheap energy stocks to buy now.
If you want to know what other dividend-paying stocks I’m currently recommending, you can subscribe to my Cabot Dividend Investor advisory by clicking here. Or, you could simply tune into my free webinar tomorrow, Thursday, Sept. 12, at 2 p.m. ET. It’s titled, “High-Yield Dividend Stocks to Boost Your Income Now.”
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Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More