The top energy stocks will have long-term appeal and can be among your best resources investments
We recommend that investors diversify their portfolio across most if not all of the five major sectors, including Resources. However, note that some resource markets are inherently unpredictable, especially energy and mines.
Take a look at our recommendations for investing in the top energy stocks below. If you follow our advice, we think you will improve your chances of making money over long periods, no matter what happens in the market.
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The top energy stocks have certain characteristics
Energy stocks include businesses engaged in the exploration for, extraction and delivery of energy sources such as natural gas, oil, uranium and coal.
The top energy stocks for long-term investment gains have some things in common.
First, these stocks typically have strong balance sheets with low, or at least manageable, debt. If they’re junior producers, we like to see a company with the funds to finance their reserves to production. These stocks are also from companies with experienced management teams. We look for an experienced management team with a proven ability to use the latest extraction and other technologies.
The best of these stocks don’t trade “over-the-counter” trading because regulatory reporting is lax in OTC trading.
Next, avoid unsustainably high prices when buying energy stocks. These prices are often a result of broker hype or investor mania.
Look at the market cap and the estimated value of the energy resource when seeking top energy stocks
We look at the market cap of energy stocks versus the estimated value of the energy resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its reserves. We like an energy stock’s market cap to be no more than half the value of those reserves. We assume that the company will be able to expand its reserves with more exploration, but if the current reserves are double the energy stock’s market cap, it provides a margin of safety.
Note that resource and commodity stocks in general should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as much as 30% for an aggressive investor. And as part of that segment, energy stocks could make up, say half of that total.
Junior energy stocks can have strong potential as top energy stocks—but use caution
Despite the strong potential of top junior energy stocks, it’s important to remember that these stocks are among the riskiest you can buy. That’s why we think it’s a mistake to load your portfolio up with these highly volatile companies.
Successful investors now recognize that research and development spending is today’s best-hidden asset. Companies have to treat this spending as a day-to-day expense, much like maintenance or tax payments. So research spending comes right out of current year’s earnings.
But when you do it right, research and development spending is more like a long-term investment than an expense. When it pays off, it can yield dramatic long-term dividends. In many cases, seemingly high-priced renewable energy stocks are much cheaper than they appear at first glance, if you give them some credit for the funds they invest every year in research and development—for example, on the newest and latest drilling techniques.
What’s the riskiest energy stock you’ve ever invested in? Did it pay off?
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