Energy stocks are better investments than Web 2.0 technology stocks. Here's why. The number one reason is valuation -- energy stocks are currently trading at low price-to-earnings, price-to-cash-flows, and price-to-book values. This discount to intrinsic value should provide investors with the margin of safety they need to protect their downside while leaving their upside to grow and profit with the underlying business.
With technology stocks, you have to pay a huge valuation premium, which makes owning shares in technology businesses tricky -- yes, the payoff is larger if you are right but for every Google (NASDAQ:GOOG) there are five Myspace's out there you want to avoid.
At Hedgephone we think oil stocks make for better investments by and large than technology stocks, but that's easy for us to say as we are a technology focused company, which conducts investment research for the public.
Here are five more reasons to prefer oil stocks to tech stocks:
- All of the monetary easing by global central banks has devalued paper currencies and the value of money per unit of oil should continue to decline as we monetize our debt in most of the world's developed nations. Investors who want to protect their standard of living should consider oil stocks as a way to protect against runaway inflation.
- Oil stocks are easier businesses to understand than technology stocks. Natural gas stocks look especially interesting given that nat gas is currently trading at all-time low price points. Oil is the black sticky goop that gets us from point A to point B while technology investments are usually early stage "on the come" bets that may very well end in heartache. Oil stocks on the other hand can be considered conservative investments in comparison.
- No one has a comprehensive solution to bring back $2.50 a gallon gas (sorry Newt, we just don't believe you!). Gas and oil prices have likely hit a permanently high plateau barring another crash in the stock market and economy. Either way, oil won't go to zero while many technology stocks will end up trading at zero down the road.
- Oil stocks have underperformed technology stocks. Now this may seem counter intuitive to many investors, but you actually want to buy low and sell high when making stock investments. Oil stocks are currently much lower on a relative basis than technology shares, which are in full-on bull market 1999 mode.
- Oil stocks are in a structural bull market while technology stocks are in a cyclical bull market. Many people think that inflation is a good thing for the economy, but that was not the case in the 1970s.
Here is a table that shows just how cheap oil and gas names are right now given current valuations and growth assumptions.
|Financial Ratios||TTM PE Ratio||For. PE||Earn Growth(Q)||Price to Book||EV/EBITDA||Div. Yield|
|Exxon Mobile (NYSE:XOM)||10.3X||9.8X||1.60%||2.67X||5.95X||2.2%|
As you can see, some of these stocks like Statoil, Valero, and Chesapeake are pretty cheap at current prices. My favorite is Conoco in the space, but even a Marathon makes a ton of sense for long-term value investors.
Now, let's look at the worst offending technology stocks, which we would not want to own for a comparison of industry multiples:
|TTM PE Ratio||For. PE||Growth Rate||P/Book||EV/EBITDA||Div.|
|Russell 2000 (NYSEARCA:IWM)||19X||N/A||15%||3.3X||10X||1%|
|Nasdaq 100 (NASDAQ:QQQ)||24X||20X?||10%||3.7X||11X||1%|
|Rovi Corporation (NASDAQ:ROVI)||N/A||11X||N/A||2X||17.5X||N|
|Mako Surgical (NASDAQ:MAKO)||N/A||N/A||N/A||17X||-56.3X||LOL|
As you can see, from a yield perspective or a cash on cash return perspective the oil stocks are clearly a more sensible choice. That said, today's stock market is like a casino -- everyone wants to hit that 20-to-1 shot and probably won't get those kinds of returns with oil and gas majors. That said, for my buck I'll stick with safe and cheap any day of the week!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.