The best energy stocks aren’t guaranteed winners, but you can avoid the worst energy stocks by staying away from those in the limelight and being skeptical of renewable energy.

Many investors who are looking for an energy investment would likely think of oil and gas first. But energy stocks also include green energy, power from renewable resources like solar power, wind power, geothermal power and generating electricity from ocean waves, plus nuclear power.

The direction of energy prices depends on a lot of things, particularly economic growth rates around the world. But if you’re looking for the best energy stocks to buy, here are some tips:

The best energy stocks to buy may be ones just entering the limelight

Sometimes, the best stocks you can find are those that are just entering the limelight—and are likely to spend a long time there due to great performance. So it pays to look on rising investor expectations as a valuable tool. But they are just one tool of many that you need to consider when you make investment decisions.

The same idea works in reverse. Sometimes, low expectations become common when a stock runs into internal or industry turmoil. Great buying opportunities can appear when investor expectations get low enough on companies that still show signs of financial stability and long-term growth possibilities.

You have to keep in mind that investor expectations routinely range more widely than investment outcomes. This applies to stocks as much as it does to the stock market. If you buy when investor expectations are low, it tends to cut your risk, especially if you stick with well-established investments.

It’s important to understand commodity pricing if you want to find the best energy stocks to buy

Commodity prices are subject to wide and unpredictable swings. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits for commodity investments. However, when the economy slumps, resource prices and commodity prices fall, and this drags down resource stock prices.

A crucial rule for commodity investing: if people generally believe the price of a commodity is sure to go up, the reverse often happens because both suppliers and users of the commodity also read the newspapers. They both take steps to protect themselves and profit from the situation. The suppliers try to increase supplies, and the users try to become more efficient or find alternative commodities.

If you’re looking for the best energy stocks to buy, be careful with renewable energy

Successful renewable energy stocks combine pioneering technology advances with steady research spending.

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 the 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.

Four strategies for finding the best energy stocks to buy in oil and gas

1. Invest in oil and gas energy stocks that use innovative new drilling and exploration techniques. Staying ahead of the curve will keep them in business.

2. Look for oil and gas exploration companies that have cash flow from existing wells that is sufficient for, or at least contributes to, the development costs of additional wells.

3. Invest in oil and gas energy stocks that own diversified drilling sites in multiple geographic locations where exploration has been successful in the past.

4. Look at the market cap of oil and gas exploration companies versus the estimated value of the reserves 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 their findings. We like an oil and gas exploration company’s market cap to be no more than half the value of the oil and gas in the ground.

There’s a wide range of energy stocks, from oil to renewable energy. Which energy stocks do you invest in based on a favourable results over a sustained period? How did you find these investments originally?

Do the hidden assets of renewable energy companies make it worth the risk to invest in them? Or do you prefer to stick with traditional energy stocks?