Here are five pointers you can use for better results when investing in energy stocks
Investing in energy stocks has a place in most investors’ portfolios. They can play a crucial role in your portfolio as a hedge against inflation.
Below we share tips for successful investing in the energy sector.
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Investing in energy stocks: Oil price predictions are inherently risky
It’s easy to look at a long-term history of oil prices and detect what you feel is a clear, recurring pattern. However, these patterns occur in response to supply and demand in the market, and both are constantly changing.
Oil optimists assume that demand for oil will keep on growing indefinitely, as more people around the world buy cars. Oil supply can also keep on expanding indefinitely, however, thanks to technological advances that have opened up vast new oil reserves in shale deposits around the world. Environmental regulations make it difficult to tap into these deposits in some areas, of course. Meanwhile, political turmoil in the Mideast and Venezuela make future supplies of conventional oil more erratic and uncertain.
Politics, weather and market sentiment will determine whether oil users stock up on oil, or cut down on new buying while they use up existing inventory. This can have a big impact on oil-price trends and the health of oil company stocks.
Investing in energy stocks: Know the risks of uranium stocks
Uranium stocks pose a unique challenge for investors who are a looking to diversify their natural resource holdings. Apart from supply and demand issues that affect the price of uranium, the metal’s use in nuclear power plants makes it a controversial energy source.
We like to see strong fundamentals in the uranium mining stocks we recommend. We look for low debt, because debt can be a problem for any mining company. When we recommend uranium mining stocks, we want to see a positive cash flow, preferably even when uranium prices are low.
Investing in energy stocks: The rise and fall of commodities
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. The rest could hold fertilizer stocks, mining stocks and so on.
Commodity investments mainly rise and fall with supply and demand. Revolutionary changes in the energy industry provide a great example of that relationship.
Investing in solar power companies can be risky for investors
Even though sunlight is free, solar power costs considerably more to generate than power from traditional fossil fuels. The main reason is the high cost of building solar plants. This includes the cost of solar panels, mirrors, transmission lines and generators, as well as the cost to buy or lease the land to put them on. However, solar power stocks still rely heavily on government subsidies.
Investing in energy stocks: It’s hard to find good green chip stocks
It’s hard to set up any company that grows into a profitable business. It’s even harder to profit in pioneering fields like those that green stocks generally focus on with the environment and alternative energy. But it’s relatively easy to launch a green chip stock promotion that purports to have answers to social problems, or ways to profit from emerging green technology. That’s why stock promotions, of green stocks or anything else, are always more common than legitimate start-ups. Still, even the legit start-ups mostly wind up going broke.
All in all, green stocks should never make up more than a small part of your portfolio. Our view is that if you want to invest so that you make money and help the environment, your best bet is to build a portfolio of well-established companies, spread out across the five main economic sectors. Then, donate some of your profits to worthwhile socially conscious organizations.
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