Friday, August 23, 2019

Investing in Energy: Time to Dip Your Toe?

Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Like it or not, oil and gas will be major energy sources for decades to come. Therefore, oil and gas can be good investment from time to time. But we won't ignore alternative energy companies, because these will be an important source of growth as time goes on. So I'll list what I think are the best ways to invest -- and whether it's time to invest or not. I'll focus on ETFs rather than individual companies for diversification and relatively low expense ratios. 

On the surface, the case for energy stocks has worsened in recent months as the escalating U.S.-China trade war and other geopolitical disruptions have heightened concerns about global growth and energy demand.

As my friend Jared Dillon at Mauldin Economics said in this month's ETF 20/20 newsletter:

I will tell you that energy is really, really beat-up here. This thesis that we won’t use oil in 20 years is stupid—but pervasive. And people believe it.

Check out a chart of XOP, the SPDR S&P Oil & Gas Exploration & Production ETF.

It’s bad out there.

In a previous issue of ETF 20/20, I talked about constraints. The idea that when there are implicit constraints on a stock—people find it embarrassing or detestable and refuse to own it—someone must own it, and that person must be compensated with higher returns.

We are getting close to that point with energy stocks.

I don’t have any particular view on oil fundamentals, supply or demand, or whatever. In my experience, trading oil is mostly a function of the economy. Secondarily, it’s about supply. The Great Oil Short of 2014 was predicated on the oil gushing out of the Bakken.

The Great Oil Short of 2008 was predicated on the financial crisis.

The Great Oil Short of 2019 is about this hippy-dippy theory that we’re all going to drive electric cars or ride around on burros.

I tend not to believe the thesis. We’re not going to dive headlong into energy just yet, but if you feel like dipping a toe, I’m not going to stop you.

U.S. oil prices have fallen to around $54 a barrel from an April high of $66. Natural gas has also been hit hard, down more than 25% this year, to the lowest level since 2016.

On the alternative front, declining costs are fostering adoption of renewable energy and that trend could be a long-term catalyst for clean energy ETFs.

So while energy ETF prices are depressed, and alternative ETFs are growing, it is a good time to put together a watch list for the future (which may not be too far off; the charts will tell).

These are a sampling of ETFs to consider (prices as of 8/23/19):

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Latest Price: $21.52
Dividend Yield: 1.17%
Expense Ratio: 0.35%
Top Five Holdings: Phillips 66, Hess Corp, HollyFrontier, Noble Energy, Valero
Number of Holdings: 63
Three-Year Return: -9.14%

Fidelity MSCI Energy Index ETF (FENY)
Latest Price: $15.35
Dividend Yield: 3.29%
Expense Ratio: 0.084%
Top Five Holdings: Exxon Mobil, Chvron, ConocoPhillips, Schlumberger, Phillips66
Number of Holdings: 132
Three-Year Return: -1.21%

SPDR S&P Oil & Gas Equipment &B Services ETF (XES)
Latest Price: $7.18
Dividend Yield: 1.02%
Expense Ratio: .35%
Top Five Holdings: US Silica Holdings, TechnipFMC, Nabors Industries, Baker Hughes, National Oilwell Varco
Number of Holdings: 38
Three-Year Return: -18.62%

ALPS Clean Energy ETF (ACES)
Latest Price; $30.69
Dividend Yield: 1.25%
Expense Ratio: .65%
Top Five Holdings: Enphase Energy, Universal Display Corp, Ormat Technologies, Itron Inc., Pattern Energy Croup
Number of Holdings: 31
Three-Year Return: N/A (1-year is +23.36%)

Invesco Solar ETF (TAN)
Recent Price: $31.02
Dividend Yield: 0.44% 
Expense Ratio: .75%
Top Five Holdings: Enphase Energy, SolarEdge Technologies, First Solar, Xinyl Solar Holdings, SunPower Corp
Number of Holdings: 22
Three-Year Return: +14.03%

These are just suggestions. There are many other energy=related ETFs and Funds. I think it's time to start watching. 

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