Written by Adam Othman at The Motley Fool Canada
The energy sector is still on the radar of most investors, but for a different reason now. A potential correction may encourage investors to make some tough decisions regarding their energy holdings.
Some investors may look to cash out when they are still on top, while others may aim to dock their energy capital into energy stocks better equipped to handle a correction. If you want to park your cash in the energy sector in its current state, three stocks should be on your radar.
A pipeline company
Enbridge (TSX:ENB) is a top energy pick in virtually any market, including the current one. It’s even more attractive right now, thanks to its 13% discount that has pushed the yield up to a mouthwatering number of 6.9%. Considering the trajectory of the stock, the yield may easily go up to (and beyond) 7% in a matter of weeks.
Another reason to consider Enbridge as a potential buy right now is its stability. As the largest pipeline company in North America that roughly a quarter of the US population relies upon for its energy needs, Enbridge might be a rock-solid long-term investment. Its dividend history is just as impressive, as the company has raised its payouts both generously and through very poor market conditions.
An oil and gas company
Cardinal Energy (TSX:CJ) is one of the top energy stocks you can buy right now because, despite its meteoric rise (over 2,000% in two years), it’s still one of the undervalued stocks of the energy sector. At least if we go by the price-to-earnings ratio, which is currently 5 for Cardinal Energy, it’s also trading at a 65% discount from its 2014 peak.
The discount and undervaluation combined might still be enough to push the stock further, and it can double your capital even if it undershoots. But this is where the current stagnant state of the energy sector comes in.
The stock may go up at a decent enough pace if the sector becomes strong and bullish for another spell, ideally one that lasts for more than a year. The attractive 6% yield is another reason to consider this stock, but the dividend history of the company is not stable enough for dividends to be the primary reason you buy this energy stock.
An integrated energy company
While Enbridge is a good pick for dividends and Cardinal a better buy for growth (in the right market circumstances), Suncor (TSX:SU) offers a little bit of both. The company “tarnished” its image a bit for some dividend investors when it slashed its payouts, but many considered its realistic decision motivated by the financial state of the company at the time a confident move.
The company has redeemed itself on the dividend front, as its payouts are currently much higher than the 2020 levels (before they are slashed).
This has pushed the yield up to an attractive number – 4.6%. As for growth potential, the stock is still quite undervalued and has outperformed the sector (since the start of 2023) by a significant margin. But since it’s following the same pattern, positive sentiment associated with the energy sector could push its value up at a decent pace.
The energy sector may not have the same energy and momentum going forward that propelled it to the current level after the 2020 crash. But even with the chances of a correction higher than a bullish run, there is no certainty about how the sector will perform in the coming months/years. Fortunately, you can leverage the top stocks to ride a positive trend.
Before you consider Cardinal Energy Ltd., you’ll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in February 2023… and Cardinal Energy Ltd. wasn’t on the list.
The online investing service they’ve run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 22 percentage points. And right now, they think there are 5 stocks that are better buys.
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Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.