Energy and Healthcare are two sectors that have not participated in the Great Bull Market that followed the Great Recession. Both have been ignored as investors flocked to Tech and Financials (including REITs and business development companies – BDCs – for yield).
On a valuation basis, I believe Energy offers the best opportunities to buy future growth at reasonable prices. According to S&P’s analysis of its 11 primary sectors as measured by their overarching sector ETFs, Energy has declined 1% over the past five years while the S&P has risen 86%.(1) Even those invested in the boring old Utilities sector have seen their investments rise 59% during this time.
But not all energy. For instance, it is in both the national security interests and the economic interests of the United States for oil and natural gas to remain somewhere in the area they both are right now.
The ideal position from a national security standpoint is that oil and gas firms are profitable enough for the best companies with the best technologies to make a profit but not so high that adversarial nations whose interests are inimical to our own receive a windfall infusion of new cash with which to blackmail, harass, fund terrorism or intrude upon America or our allies.
Do we really want to see oil and gas prices rise to the point where Russia can fund a new round of the nuclear arms race, Iran can fund its ballistic missile programs and increased terrorism, or autocracies like Venezuela can continue to prevent Venezuelans from enjoying the fruits of their labors?
The same price range works best for the average American’s pocketbook as well. Our daily lives are deeply affected by the price of energy. Where and how often we travel, whether we can afford to accept a better job with a longer commute, how comfortable we can make our internal living spaces, even what we eat all depend upon the price of energy. Gasoline at $2.40 a gallon is bearable. Gasoline at $4.20 a gallon is not. The equation is simple: affordable energy makes our lives better than they otherwise would be. On a macro level, affordable energy promotes growth.
You won’t hear me saying “I’ll buy energy companies when I think oil prices are going to go higher.” Yes, the companies will increase their earnings if that happens. But we don’t have to wait. Some companies are doing just that right now. In my opinion, the two most promising areas of growth right now, today, are in the natural gas and LNG exploration and production, transportation, and refining areas and in the extraction and processing of lithium for use as batteries and other storage systems. To keep this article less than 50 pages, I’ll concentrate solely on natural gas today, specifically on one speculative explorer and on one blue-chip refiner.
Higher gasoline prices at the pump are a bother, but not a hardship. You have made enough money on energy stocks (starting around 2001!) that the price of gasoline could go to $10 a gallon and you could still pay for it out of your profits from owning energy companies.
