From the point of view of a diversified portfolio energy stocks are a must own to manage the day-to-day volatility of owning stocks. What doesn’t make sense is owning stocks that are overvalued or have some fundamental characteristic that makes it a poor investment and maybe not even a good speculation. For a look at the Energy sector long-term check out this TSX Energy Index 10 year chart.
What’s wrong with this picture? Maybe we should drill down and have a look at individual stocks
What about choosing individual stocks, should you own Suncor or TransCanada Pipelines. 10 year chart comparing SU with TRP? TransCanada appears to be a better long-term investment even though many would not have said that back in 2005. Crescent Point or Arc Resources? Ketch or CMG? What about the returns including dividend? The argument might be that if you look at the total return you would get a different answer.
10 Year Total Return Chart
This is a total return(including dividends) chart comparing Trans Canada Pipelines, Suncor Energy, Crescent Point, and Arc Resources. As you can see Suncor has much lower volatility and much lower returns. Until recently Crescent Point was the standout winner. Was it overvalued when it had its winning years? Is it still overvalued?
What method should we use to judge if energy stocks are a good investment or how do we choose between individual stocks?
NAV or net asset value is the method that makes the most sense. Look at the cash flow the company will generate in the future and discount back to the present day using a simple formula or spreadsheet. Then take off the Net Debt of the company and then you have what the company is worth. Divide by the share count and then you know what it is worth per share, simple, right.
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