Currently, investment in commodities is suffering. Many investors, myself included, are tired of getting hammered year after year. Unfortunately, investing in commodities is a long-term game. Market recovery can take years. The wait can be tough, even for seasoned investors.
The good news, however, is that the fall in commodities is much more limited compared to the upside potential. Most commodities are so shot down that it’s pretty easy to see that there is potential for massive gains when the markets recover.
Oil stocks are attractive
Oil stocks have recovered slightly in recent weeks, but are still far from overvalued. With prices at the lowest, it is not difficult to choose great companies at reasonable prices. Don’t look too far down the food chain in these stocks. Large-cap oil producers will have sufficient leverage.
A stock that is at a very attractive level is TC Pipelines LP (TSX: TRP) (NYSE: TRP). A few weeks ago, the pipeline giant was very close to its 52-week low. That’s right, you could have picked up this stock with a return above 6% at prices reflecting the March lows.
Despite this, this pipeline is still trading at a reasonable price / earnings ratio of 11 times the trailing earnings. The pipeline giant supplies more than 25% of the natural gas North Americans use to heat their homes. It also owns or holds interests in seven power generation facilities in Canada.
Even though the stock has recovered slightly recently, it still has an attractive yield of just under 6%. The dividend has been rising for years, including an 8% increase earlier this year. Despite the craziness of 2020, this resilient company is still aiming for 8-10% dividend increases through 2021 and healthy 5-7% increases thereafter.
The wise choice
What investors need to understand is that owning energy stocks like TC Pipelines gives you a great opportunity for value in a world where cash flow is hard to come by. This company has proven that it is possible to make money and return it to shareholders despite difficult macroeconomic environments.
Of course, if there’s anything the last decade has shown me, it’s that it takes patience to make money in commodity stocks. Owning these stocks can be a humbling experience, but in the long run, it will be worth it. If you have a tight stomach and the ability to wait, the upward movements can be huge.
The bottom line
You don’t have to buy what everyone else is buying to make money. In fact, most of the money will be made in the unloved areas outside of the mainstream. This is doubly true for the difficult commodity market.
Oil stocks are one of the most hated industries right now, so there are certainly deals out there for patient investors. A stock like TC Pipelines will give you market exposure, high potential returns, and strong cash flow while waiting for the sector to rise.
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Fool contributor Kris Knutson owns shares of TRANSCANADA CORP.