The coronavirus pandemic has laid waste to the global economy. U.S. economic activity is expected to fall by double-digits in the second quarter, and almost 30 million Americans have filed for unemployment since mid-March. In order to help support the economy, the U.S. government passed a massive aid package that sent money to almost every American family.
For many people, this extra cash presented a welcome opportunity to add to -- or maybe start building -- a nest egg. Another great way to put that stimulus check to use is by creating long-term wealth by investing it in stocks.
Three popular ideas for investing right now include beleaguered aerospace giant Boeing (BA -2.87%), beaten-down oil stocks, or just a low-cost index fund like the SPDR S&P 500 ETF (SPY -0.05%). So what's an investor to do? Bet on a turnaround for troubled Boeing that could be years in the offing, stay with the safety and diversity of the S&P 500, or make a risk/reward investment in the oil patch?
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We asked four top contributors who cover these industries to weigh in. While all four agreed that it makes sense for just about anyone to invest in a low-cost index fund, two contributors offered up compelling stocks in the oil and gas industry -- Kinder Morgan (KMI 0.27%) and Phillips 66 (PSX -0.66%) -- that you may want to consider as well.
No speedy turnaround
John Bromels (SPDR S&P 500 ETF): This is a tough call. It's not clear what actions the government might be willing to take to rescue the ailing Boeing or to help out the oil and gas industry in general. But unless something materializes, I'd sooner put my stimulus check in a good old-fashioned index fund.
The oil industry and Boeing have fallen a lot further than the market in general: Boeing is down about 60% year to date, and there are plenty of oil companies whose shares have fallen even further. Meanwhile, the S&P 500 is only down about 13% from the high point in February. So it might seem like if things get "back to normal," Boeing and oil have more upside.
However, it's likely to take much longer for Boeing and the oil industry to get back to normal than it takes the broader market. At Boeing's annual shareholders' meeting, CEO Dave Calhoun warned investors that it could be three to five years before the company is able to restart its dividend. And, of course, it's anyone's guess how soon the market for new planes might rebound.
As for oil, global demand has fallen by tens of millions of barrels per day. Here in the U.S., we're close to running out of storage for all the oil that's still being pumped. Even once demand recovers, it's still going to take months, if not years, to deplete the excess.
As an economic recovery begins -- whenever that happens -- the broader market is likely to start rising while Boeing is still ailing and the oil markets are still trying to absorb a massive oversupply. That's why I'd pick the index fund here.
Bet on diversity
Travis Hoium (SPDR S&P 500 ETF): I think the best investment of these three is index funds, but I want to go over why it's the winner by default.
Oil stocks are in a world of hurt right now with oil trading near single digits and even going negative in April. Dozens of oil producers could go bankrupt as a result of low prices and even big oil stocks are going to feel the pain of low prices and falling oil demand. Betting on a recovery is a gamble, at best, right now.
Boeing will suffer from the short-term decline in travel, which its management says could take years to get back to pre-COVID-19 levels. I think Boeing will eventually get back to business as usual, but orders may be put off and profits will be down for the foreseeable future if air travel is down like it is right now. Like oil, Boeing is a gamble.
With index funds, investors aren't betting on any specific stock and are instead getting a big basket of stocks. Long term, I think the market will recover and there will be some great deals over the next few months, but identifying those winners will be tough. Instead, betting on a big basket like the S&P 500 with SPDR S&P 500 ETF is a better bet than oil or Boeing. The companies in the index are relatively large and stable, so when a recovery comes they should be able to pounce on the opportunity.
Some oil stocks look quite attractive
Matt DiLallo (Kinder Morgan): I'm a big believer that a low-cost index fund is the best option for most investors, especially those who don't have the time or desire to manage a portfolio of stocks. So, that would be my standard advice for someone who wants to invest their recent financial windfall.
However, I'm a bit more of a value investor, which has me somewhat concerned with the run-up in the stock market from its COVID-19 bottom a few weeks ago. I think it has gotten a bit ahead of itself since I'm not entirely on board with the idea that the economy will quickly bounce back. Because of that, I think there could be more volatility ahead for the overall market.
On the other hand, I see some value in oil stocks, which have tumbled due to the impact the outbreak has had on demand. In particular, several pipeline companies (which are largely immune to the effect of low oil prices) trade at enticing valuations. Kinder Morgan, for example, believes it can generate $4.6 billion, or $2.02 per share, of cash flow this year, which is only about 10% below its initial forecast. Shares of the pipeline giant, however, are down 30% this year and currently trading at around $15 apiece, implying it now sells for a dirt cheap price of about 7.5 times cash flow. Because of that sell-off, and Kinder Morgan's recent 5% dividend increase, its stock yields an enticing 7%. That payout alone would enable an investor to turn their one-time stimulus check into a long-term income stream.
Deep value for patient investors
Jason Hall (Phillips 66): With the market in turmoil, it's easy to forget Boeing had its share of problems before the COVID-19 pandemic grounded the majority of global air travel. And while I don't think that's a nail in the company's coffin, it's a reminder the company had plenty to fix before the biggest crisis in the history of air travel happened. Skip Boeing.
I also tend to agree with my colleagues on the benefit of the S&P 500 index fund. It gives investors instant diversification, and I think it's an ideal core stock investment for most people.
But...
I also see some market-beating opportunities in the oil patch for investors willing to wait out a protracted downturn. One of the biggest refiners in the world, Phillips 66 is positioned to profit from ultra-cheap crude when gasoline demand stabilizes, and in the meantime the natural gas pipelines, storage, and petrochemicals segments are holding up well.
The epic oil crash has shares down 38% from the high, but the company doesn't face the risks oil producers do. Refining should bounce back relatively early in the economic recovery, and its natural gas segments will help pay the bills in the meantime. Whether the economic recovery takes months or years, I expect Phillips 66 to be a market-beating investment.
