With energy stocks having bucked the market trend this year, generally going up as the major indices have collapsed, finding bargains in the sector is just about impossible. It seems like every US based oil and gas company is knocking around its 52-week high. A couple of weeks ago, despite that, I wrote that I am still bullish on big oil based on oil prices that, while choppy, have held up well in the face of a global recession threat, the fact that I'm not sure that threat will materialize, and, most of all, big oil stocks' low P/Es relative to both index averages and their own recent history.
I still feel that way overall, but in the last two weeks, the risks to those stocks have increased a bit. The missile that hit the territory of NATO member Poland this week, wherever it came from and whatever the intention behind its launch, demonstrates the constant danger of escalation when there is a war close to NATO's border, for starters. Then there is the fact that according to the UK Chancellor of the Exchequer, their finance minister, that country is already in recession and the reported increase in Covid in China following some easing of their "Zero Covid" policy.
So, while I am happy to maintain long positions in big oil, I am starting to trim them a little on rallies. That, though, presents the problem of what to do with the cash those sales generate. My natural instinct is to shift from those stocks that have posted big gains this year into something that has underperformed…
With energy stocks having bucked the market trend this year, generally going up as the major indices have collapsed, finding bargains in the sector is just about impossible. It seems like every US based oil and gas company is knocking around its 52-week high. A couple of weeks ago, despite that, I wrote that I am still bullish on big oil based on oil prices that, while choppy, have held up well in the face of a global recession threat, the fact that I'm not sure that threat will materialize, and, most of all, big oil stocks' low P/Es relative to both index averages and their own recent history.
I still feel that way overall, but in the last two weeks, the risks to those stocks have increased a bit. The missile that hit the territory of NATO member Poland this week, wherever it came from and whatever the intention behind its launch, demonstrates the constant danger of escalation when there is a war close to NATO's border, for starters. Then there is the fact that according to the UK Chancellor of the Exchequer, their finance minister, that country is already in recession and the reported increase in Covid in China following some easing of their "Zero Covid" policy.
So, while I am happy to maintain long positions in big oil, I am starting to trim them a little on rallies. That, though, presents the problem of what to do with the cash those sales generate. My natural instinct is to shift from those stocks that have posted big gains this year into something that has underperformed and has a bigger long-term upside, something that represents more value. However, as I already mentioned, value in the energy sector is hard to find right now.
I took my usual approach to looking for something to buy, starting with the big picture. I didn't get past the geopolitics, though, before a potential opportunity occurred to me. One effect of the war in Ukraine and Russia's subsequent weaponization of their vast oil and gas reserves has been an increasing push in Europe, and to a lesser extent elsewhere, to move further away from dependency on those energy sources and to add to investment in alternatives. An international company with broad exposure to alternative energy sources could benefit from that for years to come, and that is what Brookfield Renewable Corporation (BEPC) is.
They provide solar, hydroelectric, and wind energy, and operate in the US, where they are based, but also operate in Latin America and Europe. When I pulled up the chart for BEPC, though, that is what really piqued my interest.
Far from being at its highs, BEPC is not too far from its 52-week low. As far as I can tell, though, the reason for that is not a weakness in the business but rather is to do with the nature of the stock. BEPC is basically an MLP without that exact structure and resulting tax reporting headaches. The company operates as essentially a pass-through operation, distributing a large part of its profit to shareholders. That means that a lot of the appeal of the stock has typically been based on its dividend, currently around 4%. However, with the Fed raising rates and a 10-Year Treasury paying about the same, BEPC has fallen out of favor with other dividend payers.
Another knock has been that the energy they produce is generally sold through long-term contracts, meaning that they cannot take advantage of rising energy prices as much as some others. However, what that also means is that income is guaranteed, no matter what happens to the global economy. If, as I still think is most likely, there is a soft landing, with a slowdown that falls short of a deep, damaging recession then rate hikes will stop and the yield of BEPC will once again be attractive. If, on the other hand, things do get significantly worse, they will still get paid on those contracts, giving them an edge over most other companies.
BEPC looks like value based on current pricing, but it also has added value in the current circumstances, in that it can act as a hedge against the kind of economic weakness that poses the main risk to holdings in big oil right now. And, while you wait, you get paid 4%. In a market where both value and an effective hedge are hard to find that's good enough for me!
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