We’re seeing strength in commodities across the board. In fact, a handful are making new, all-time highs such as copper, iron ore, and lumber. Even the laggards are starting to move higher such as crude oil, gasoline, and natural gas.
The factors driving strength in these assets are pretty similar. The coronavirus resulted in significant production disruptions, and many companies aggressively cut costs including capital expenditures to preserve cash. Like the rest of the world, they anticipated a meaningful time period in which demand would remain weak. However, demand did not drop as much as anticipated and for many commodities – it’s now higher than it was in 2019.
Of course, a contributing factor is that the previous bear market in energy has led many companies to be hesitant about taking on more debt and invest significantly in new production. Prices may have to go much higher before supply starts increasing. Thus, in the intermediary, energy prices could have significantly more upside in the coming months. To take advantage of this, investors should consider investing in these 3 energy stocks: Sandridge Energy (SD), Canadian Natural Resources (CNQ), and Sunoco LP (SUN).
Sandridge Energy (SD)
SD is one of the best-performing energy stocks of this bull market. A major catalyst is that it was able to significantly reduce its debt burden by selling some of its assets. And, they received a better price than expected. For example, it was able to sell about 10% of its assets and received a price equivalent to 42% of its market cap.
Carl Icahn has been accumulating shares in SD and owns about 13% of the company. He also helped out the company by giving it a low-interest loan which it was able to use to retire some of its debt at considerably higher rates.
These measures helped reduce costs, and the rise in oil and natural gas prices led to its assets appreciating. The outlook for natural gas is particularly interesting as it’s been a significant underperformer over the last decade, and CAPEX in the space has dried up. At the same time, natural gas demand is above 2019 levels and is only expected to increase due to EVs and the phasing out of coal for power generation.
In terms of the POWR Ratings, SD is a solid choice with an Overall rating of B which translates to a B. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree. B-rated stocks have an average annual performance of 19.7% which compares favorably with the S&P 500’s average annual return of 7.3%.
To see more of SD’s component grades, including Value, Momentum, Stability, Sentiment, Quality, and Industry, please click here.
Canadian Natural Resources (CNQ)
CNQ is an oil and gas producer, based in Western Canada with operations in the North Sea and Offshore Africa. The company’s portfolio includes crude oil, natural gas, bitumen, and synthetic crude oil. CNQ’s Horizon Oil Sands and Athabasca Oil Sands Project hold leases on approximately six billion barrels of synthetic crude oil reserves.
The company is diversified in terms of its operations and production which makes it a lower-risk bet in the sector. It’s also been able to increase dividends for 20 years until last year, although management looks likely to increase it this year. For these reasons, CNQ is considered a higher quality company in the energy space.
The POWR Ratings are also constructive on CNQ as it is rated a B which translates to a Buy. The company has an intriguing mix of growth prospects due to oil’s bullish fundamentals and CNQ’s ability to increase production. At the same time, it’s very reasonably valued with a forward PE of 12.8.
CNQ also has a Momentum grade of B. This is fascinating as energy has been an underperformer since 2018. But, CNQ is up 33% over the past 3 months and 87% over the last six months. Since mid-February, the stock has been trading in a tight range, and an upside breakout seems likely. To see more of CNQ’s component grades, please click here.
Sunoco LP (SUN)
SUN is primarily a refiner of petroleum, so its prospects are closely tied to the price of gasoline. Many analysts believe that gasoline prices could explode this summer even to the point of shortages. The major factor is that production has been slow to return to normal levels due to the pandemic and related supply chain issues.
However, demand is expected to be quite strong as the country reaches “herd immunity”. People will be eager to get out of the house. Even in normal years, gas prices tend to spike during the summer. This year, the effect will be magnified.
SUN is also attractive as it pays a 9% dividend. From a valuation perspective, it has a forward PE of 9 which is more than 50% below the S&P 500. Further, it expects to grow EPS by more than 110% over the next 12 months. Given this impressive growth and value picture, it’s not surprising that SUN is rated a B for Growth and Value by the POWR Ratings. If you’re interested in learning more about SUN’s POWR Ratings then click here.
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SD shares were unchanged in premarket trading Monday. Year-to-date, SD has gained 30.97%, versus a 12.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More…
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