Thoughts on the Energy Sector
By
Fai Lee CGA, CFA, Equity Analyst
Monday, December 15, 2014
Buy Low, Sell High. It’s very simple investment advice isn’t it? Unfortunately, it’s not that easy to execute. When things are going well, we can become overly optimistic. On the opposite side, doubt creeps in when things are going poorly like they are in the North American energy sector. While these are uncertain times for the energy sector, we are reasonably confident about a few things:
1. Buying energy stocks at a lower valuation (not necessarily price) improves our margin of safety.
2. It is better to avoid being a hero if there is a risk of going to zero. One may be tempted to buy the most beaten up stocks, but there are usually good reasons why these stocks are performing so poorly. Regardless of how long this downturn lasts, we believe the strong will survive and, thus, it is better to invest in higher quality companies. Leave speculation to speculators.
3. The energy sector has been and always will be a cyclical sector. At some point, economics will kick in: prices fall => supply decreases and demand increases => prices rise => supply increases and demand falls => prices fall; and so on and so forth.
Oil prices must be getting pretty close to “the bottom” of the cycle. With this in mind, we are more optimistic about the long-term return potential from the energy sector and are on the lookout for new investment opportunities.