In a Suddenly Uncertain Market, It Makes Sense to Fortify Your Portfolio with Cheap, Dividend-Paying Stocks. And There are a Lot of Cheap Energy Stocks Right Now.
In these coronavirus-riddled times, it makes sense to take a step back and remember the basics of investing.
One of Wall Street’s oldest investment adages is still the best: “Buy good companies cheap.” It’s not complicated. In fact, it’s so simple it’s brilliant. Believe me. Vast fortunes have been made by investors who only understand this one rule.
Yet, it’s easy to forget. We get caught up in the times. We find ourselves slavishly following the headlines and preoccupied with momentum and convergence/divergence patterns and the like. But this market is like a game of musical chairs where the music has been playing for a really, really long time. Maybe it’s time to rethink things and shift gears a little bit.
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The market is not far from an all-time high in the oldest recovery and bull market in history. Sure, the economy is still good and interest rates are low. But this is increasingly looking like the time in the movie when all hell breaks loose. And now there’s the coronavirus. Will this be a big problem for the market? I don’t know. Nobody does.
At same time, if you run for the hills and get out of the market, you could sit on the sidelines watching stocks continue to forge higher for years. Then what do you do?
It’s a tricky market where you have to play offense and defense at the same time. Fortunately, I found the perfect stock sector to do that with – energy.
This bull market may be continuing and the market indexes may be near all-time highs, but there’s a sector that thinks this is the 1930s. Get this: The energy sector is the worst performing of the 11 S&P 500 stock market sectors for the last 10-year, five-year, three-year, one-year, year-to-date, three-month and one-month periods. It was already bleeding on the ground and now it’s being kicked by the coronavirus. And that means there are a lot of cheap energy stocks out there.
Over the past 10 years, while the S&P 500 is up over 200%, the energy sector has posted negative returns. That’s some serious underperformance. What’s going on?
The U.S. is in the midst of an energy boom. Thanks to new technologies in fracking and horizontal drilling the country has gone from being a marginal energy producer at the end of the last decade, hopelessly dependent on foreign sources of oil, to the world’s largest energy producer. Apparently, that’s the worst thing that could have happened to the stock sector. If only the country had irresponsibly neglected our energy bounty and remained slaves to foreign oil, the sector would probably be doing great.
As it is, vast new supplies of oil and gas on the world market has led to low prices, and decreased profits for many companies. Coronavirus fears have caused a further selloff in energy prices as investors’ fears decreased energy demand.
No sector is in the doghouse forever. Sooner or later, energy stocks will come roaring back. There’s no doubt about it. But, at this point, you don’t even need a recovery in the sector to make money. Just a minor recovery from the latest bludgeoning will be profitable. At the same time, these stocks should do okay if the market turns south because prices are already beaten down.
In this high-priced and uncertain market you can still find great value with terrific longer-term prospects. You also get big dividends and cheap energy stocks that are likely to bounce higher in the near future. I found two good ones.
2 Cheap Energy Stocks to Buy
Cheap Energy Stock #1: Enterprise Product Partners (EPD – yield 7.1%)
Enterprise Product Partners is 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 has $36 billion in annual revenues from an unparalleled reach in the industry with over 49,000 miles of oil and gas pipelines 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.
There are several reasons why EPD is my favorite pick in the energy sector. As a big company it has an advantage as it is much easier to get regulatory approval for expansions to existing facilities than new ones. The company also has great exposure to the fastest-growing areas like liquid natural gas (LNG) and crude oil exports. In fact, Enterprise has over $9 billion in major projects under construction that will boost earnings, with billions coming on line in the next year.
It also has a pristine balance sheet with debt at just 46% of assets and the highest credit rating in the midstream energy space. Since its IPO in July 1998, the stock has returned over 1,800% compared to just 328% for the S&P 500 over the same period. And that’s despite the fact that the stock is still selling more than 30% below the 2014 high. Yet over that six-year period earnings have grown by an average of better than 11% per year, and the stock is selling close to the lowest valuations in its history.
Then there’s the dividend. EPD currently yields a whopping 7.1% on a dividend that is rock solid. It’s solid because the company has an industry high 1.7 times distribution coverage. It has also raised the payout for more than 60 straight quarters in good times and bad.
This is a dirt cheap energy stock with great value that should move higher at some point. In the meantime, you get over 7% to wait on a stock with limited downside.
Cheap Energy Stock #2: Chevron (CVX – yield 4.9%)
Chevron is one of the world’s largest integrated oil and gas companies with operations all over the world. The company is involved in every facet of the energy industry but revenue is heavily skewed toward exploration and production.
Unlike EPD, Chevron is exposed to oil and gas prices. However, CVX has consistently outperformed the energy index while prices have fallen. It makes up for the 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 oil companies.
The tough energy market has made this company lean and mean with more upside leverage when things turn around. Chevron’s cost per dollar of BOE produced has fallen from $18 in 2014 to under $10 today. Look at it this way. The stock produced positive returns amidst a historic bloodbath in the sector. Think what it could do if things improve.
In addition to new projects coming on line this year and next, I particularly like its 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 U.S. and, by far, the fastest-growing oil region in the world.
This is a great energy company selling at a dirt cheap valuation amidst a rocky time for the industry. And it’s the rare blue-chip stock selling cheap, and paying a terrific 4.9% yield.
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