Are energy stocks a good buy right now?
Accordingly, earlier in the year I took a modest flyer on Nuttall’s NinePoint Energy ETF (NNRG/Neo exchange). His focus is Canadian mid-cap energy stocks, although there is a small 7.8% weighting to US energy stocks. The top 10 holdings list includes household names like Suncor and Cenovus, but also less familiar—to me anyway—names like Hardwater Exploration and Nuvista Energy Ltd.
Thus far, the fund has done very well. In one “Financial Post” piece, he observed that as ordinary investors and institutional investors jump aboard the theme, the action will increasingly shift to the bigger household name large-cap energy stocks. By late October, even as skeptics were starting to wonder whether oil prices had topped out near US$80 a barrel, Nuttall was still insisting “the oil party has just begun.”
Here’s what Roberts, who also blogs at cutthecrapinvesting.com, says about Nuttall’s thesis: “I do buy Eric’s argument, he lays out the math with regularity … I think the numbers are there if we have $60 (and plus) oil, and Canadian producers are better positioned than many of the U.S. players. Nuttall finds more free cash flow torque in the mid caps.”
Ardrey says, unless you have stock-picking expertise, using an ETF is the better way to go. “This will give you exposure to the sector, while reducing company-specific risk. Additionally, you need to consider how much exposure you are willing to have to a single sector and how the risk of what has tended to be a more cyclical sector fits into your profile as part of your overall asset mix.”
It makes sense to use someone like Nuttall to pick unfamiliar small- or mid-cap stocks. For larger-cap Canadian energy plays, you could go the ETF route, or do what Roberts often does and cherry-pick a few names from the ETFs.
One such ETF I bought early this year was BMO’s ZEO, an equal-weighted ETF that holds only about 10 Canadian names. Being equal weighted, its positionings in natural gas are a higher-than-would-be case in a market-weighted equivalent fund. Compare the holdings of ZEO and XEG, and the equal weighting is the major difference. Thus, Suncorp makes up 24% of XEG, versus only 10.55% of ZEO; it’s a similar story with Canadian Natural Resources, which is 23.4% of XEG but just 10% of ZEO.
Like NNRG, ZEO has performed well in 2021. This led me to consider what international and US ETFs might complete the picture outside Canada. Ardrey cautions: When investing in non-Canadian securities, you need to also consider the impact of currency.
“A weakening U.S. dollar versus the Canadian dollar will reduce returns and strengthening one will enhance returns. This is just an additional consideration for investors if looking to diversify into energy beyond our borders.”