As I have mentioned earlier, investors in today’s low oil climate should pay attention to the energy sector. There are a lot of good deals there. You have to remember that the stock market, as a whole, is overbought. That’s right. Most stocks out there are just worth too much money. They are overvalued. Their price-per-earnings ratios are sky-high.
The smaller the company and the higher the price-per-earnings ratio, the higher is the likelihood that you would get burned if the market crashes. Keep in mind that what goes up eventually has to go down. The stock market is no exception to this. A lot of the market’s valuation currently is due to all the cheap stimulus money unleashed by central banks like the Bank of Japan, the European central bank, and of course the US Federal Reserve. With all these as a background, it is a good idea to get in to oil stocks.
The energy sector has been trashed quite a bit, and there are a lot of solid global names that are selling for a discount. With that said, you should use some key guidelines as to which stock to get. Just because a company is in the energy sector, it doesn’t automatically mean you should buy that company. You have to pay attention to the following factors.
First, make sure that the energy company has geographic diversification. This means that this company gets its oil from many different stocks all over the world. Why is this important? If there are any political issues or regulatory issues with one particular source, a geographically diverse company can recover very quickly.
Second, it has to pay dividends. You can tell solid companies from not-so-solid companies based on their ability to pay a cash out for their stock. Pick only energy stocks that pay dividends. Of course, the higher the dividend, the better choice the stock is.
Also, you need to pay attention to low debt levels. This is extremely important. A lot of energy players in the United States are over-leveraged. This means that they have too much debt. It takes them longer to recover. Also, their stock can get hammered really hard if they have too much debt. Putting all these factors together and using them as a filter, you can see that there are quite a number of attractive energy stocks out there.