How to Benefit from Stock Investments in Energy - dummies

How to Benefit from Stock Investments in Energy

By Paul Mladjenovic

Fortunately for investors in the stock market, the energy sector has more opportunities than problems. The energy sector actually has something for many different types of investors:

  • For environmentally conscious investors, opportunities in “green energy” are certainly there, but patience will be necessary as the transition is slow. Our economy is huge and diverse, and transitioning to solar, wind, and similar sources of energy will take time. Many companies have not yet established consistent profits, growth, and product development, but that will come in due course.

    Cautious investors are better off looking for mutual funds and/or exchange-traded funds (ETFs) in this industry until leading companies and profitable technologies emerge.

  • For growth-oriented investors, domestic energy production and new technologies in areas such as natural gas and shale oil are gaining traction and offer some good opportunities for growth.

  • For income-oriented investors, plenty of opportunities are available to mine (pardon the pun!). Many energy firms offer solid dividends, so do your research.

  • For conservative investors, the large cap oil and gas companies are still good energy plays, and most of them are adapting well in the new and diverse energy environment. (Large cap companies are valued at $10 billion to $50 billion.)

You should be aware of the concern of peak oil. The world production of sweet crude oil (the primary staple of modern economies) has hit its peak — supply is getting more and more difficult to find. As of October 2012, oil is still north of $80 a barrel. That will continue to be a drag on economic growth until alternate energy production kicks in in some meaningful way.

Overall, the energy sector for the foreseeable future offers strong opportunities for most stock investors. A good example is how energy has performed since the 2008 financial crisis. The price of oil fell to less than $40 a barrel in late 2008 but has risen 125 percent since.

In the same time frame, leading oil and gas companies like Exxon Mobil (XOM), for example, went from around $61 per share to $90 in October 2012. That’s a rise of about 47 percent (not including dividends). Not spectacular, but still a decent rise.

As you read this chapter, you may not be sure about what particular company you should invest in. If that’s the case, why not consider a convenient way to invest in an entire industry or sector? A good consideration is an exchange-traded fund (ETF). An example is XLE. XLE has a cross section of the largest public oil and gas companies, such as Exxon Mobil, Chevron, and others.