The current economic downturn has hit oil stocks hard, and bargain-hunting investors are picking through the wreckage to see what looks salvageable. Sadly, the problems in the oil industry -- including oversupply, lack of storage, and persistently low prices -- may stretch on for months or even years after a recovery. There are better prospects in other sectors.
With that in mind, we asked five of our Motley Fool contributors with oil industry expertise what stocks look good to them outside the energy sector. They came back with Walt Disney (DIS 0.56%), Medical Properties Trust (MPW -0.36%), Axon Enterprise (AXON 0.99%), Waste Management (WM 1.22%), and NV5 Global (NVEE 1.42%). Here's why they think these are better buys than most oil stocks.
The king of content
John Bromels (Walt Disney): Baby Yoda. Buzz Lightyear. The Incredible Hulk. Homer Simpson. Indiana Jones. Elsa. Mickey Mouse. If you recognize any of those names, you know what a huge asset Disney's content stable is. The company has been able to leverage those iconic characters -- and many, many more -- into smash hit movies, TV shows, and even theme park rides.
Disney's operations -- and its shares -- have been slammed by the coronavirus pandemic, which has forced it to shutter its theme parks, postpone its movie releases, and cancel its cruises. However, Disney is still putting its content stable to work as it grows its Disney+ streaming service and airs reruns of past sports games on ESPN.
Those at-home options don't offset the shutdowns, of course, but when things return to normal, does anyone think kids (and many grownups) are going to stop begging to go to Disney World or to see the latest Pixar movie? Although its shares may experience some hiccups in the short term, Disney is a long-term winner.
Healthy growth ahead
Matt DiLallo (Medical Properties Trust): Shares of hospital real estate investment trust (REIT) Medical Properties Trust have tumbled about 20% this year on concerns that its tenants might not have the cash to pay rent as they battle the COVID-19 outbreak. However, that hasn't been the case. So far, it collected about 96% of the rent due in April. As a result, it's still on track with its forecast to produce $1.65 to $1.68 per share of cash flow this year. That implies the company trades at less than 10 times cash flow, which is cheap for a REIT, especially one that has a strong financial profile and growth pipeline like Medical Properties.
The company is currently working on a tremendous set of opportunities, which has only grown since the pandemic hit as more hospitals seek to cash in on their real estate so that they can free up that capital for patient care.
As Medical Properties Trusts acquires additional hospital real estate, it will bolster its rent roll and cash flow. That should provide it with the funds to keep growing its roughly 6%-yielding dividend. This view stands in contrast with most oil stocks, which have seen their payouts plunge alongside crude prices, making it a better stock to buy on this year's dip.
A durable business that will last for decades
Tyler Crowe (Waste Management): If you want to know the state of the economy, then sifting through the trash is a good place to start. Waste Management, the nation's largest trash handling, disposal, and recycling business, is very much an economic bellwether. While the company is likely to hit a few speed bumps during this economic pause, Waste Management is one of those businesses built to last. It's a great stock to buy when share prices dip.
Revenue for trash collection comes from three primary sources: residential, commercial, and industrial. Where residential revenue is fixed, commercial and industrial collections tend to have a more dynamic pricing model around the frequency of disposal, weight, and the type of waste collected and disposed of. With most commercial and industrial activity on pause, we're probably going to see a drop in revenue until these sectors recover. Even if that takes time, the good news is that the trash collection and disposal business isn't at risk of getting disrupted anytime soon. Waste Management has a dominant position in this industry and hard-to-replicate assets, such as landfills.
Management is getting the company ready to handle a downturn. It has suspended share buybacks and scaled back capital spending to preserve cash. At the end of the most recent quarter, it had over $3 billion in cash on the books. It shares are rarely cheap, but it's a resilient business that churns out cash. With its dividend yield t over 2%, this looks like one of the more attractive times to buy shares.
Disruption in law enforcement
Travis Hoium (Axon):If you're avoiding oil stocks like I am and looking for growth opportunities, you should consider a company disrupting an industry that's been around for centuries. That's exactly what Axon is doing in law enforcement, providing less-lethal tasers and body cameras that could change the way law enforcement is performed around the world.
Axon's body camera segment is its most important growth product, because it pairs a camera with services such as cloud storage, records management, and even an evidence management system. These products and services are being sold through long-term subscriptions that carry gross margins of as high as 80%. That's going to drive incredible profit growth for Axon long-term.
Where I think Axon separates itself from other investment opportunities is how the company is ingraining itself into customers' workflows. Body cameras are becoming standard for law enforcement officers, but using a records and evidence management system from Axon every day will make the product very sticky. An initial five-year contract could become the beginning of a multi-decade relationship between law enforcement agencies, and that's an attractive business to own long-term.
A massive growth industry with a much better future than oil
Jason Hall (NV5 Global): Infrastructure is only growing more important. This includes the energy industry, but also telecommunications, transportation, water, waste, and others. The global middle class will grow by 1 billion people over the next decade, mostly in developing economies. Mature economies including the U.S. and Europe are dealing with crumbling infrastructure that needs to be modernized.
That's why NV5 Global is my pick for a better stock to buy on the dip than oil stocks. It's already been a huge winner since going public, and I expect that run to continue in the future.
At recent prices, shares are down 47% off the 12-month high and down 36% since February, crashing along with most stocks as the implications of the coronavirus pandemic became more apparent. But while other stocks have recovered, NV5 shares have stayed down on expectations that infrastructure spending will remain subdued for the foreseeable future.
And while that could prove true to some extent, there are few businesses I'd rather buy at recent prices than NV5 to profit over the long term. While the oil and gas industry drowns in a mess partly of its own making, infrastructure investments could prove part of how governments spend their way out of a recession. NV5 is likely to be a huge winner from the growth of infrastructure in the decades ahead.