I'm proud to be under 30 yet still have the better part of a decade's investing experience under my belt. In that time, I've seen a complete business cycle of boom, bust, and now recovery. Through it all, I'm happy that my investments have beaten the market, but I'm much happier with all of the lessons I've learned from hands-on investing. (Even if a couple of these lessons proved to be expensive.)
In the past, I've invested in telecoms, consumer cyclicals and non-cyclicals, technology, insurance, death-care providers, and a few REITs. I'm still big on variety; a glance at my current portfolio reveals Costco Wholesale (NASDAQ:COST), PetSmart (NASDAQ:PETM), and Chunghwa Telecom (NYSE:CHT), to name a few. But one sector I've never invested in is energy. I don't follow it closely, and I've never felt the need to have it in my portfolio. However, given the strong growth in energy demand in Asia and around the world, I'm becoming more and more interested.
A new idea opens doors
In the past, I've considered diving into the details of ExxonMobil (NYSE:XOM) and PetroChina (NYSE:PTR). But just as I would set aside some time to research these businesses in detail, I'd always be lured away by another investing opportunity that I already understood better. However, this weekend I sat down and read all of the selections in Stocks 2006, besides my own, and I came away intrigued by one particular energy company despite its recent troubles.
Like many energy companies, this company has delivered a phenomenal performance over the past couple of years, including a near doubling in net income last year and a very strong performance so far this year. The company's fortunes are strongly tied to the price of oil, and a material decline in oil prices would likely lead to an even more serious decline in the company's share price. However, in comparison with its peers, this dividend-paying company is reasonably valued.
After reading the analysis on this company, I'm interested in one of its peers as well. It's a bit more expensive from a valuation perspective, but it has more diversified operations, and it's a larger company. I'll have to do more analysis before I decide whether to buy either of these companies; my choice will depend largely on how I feel about their business prospects and whether they're still reasonably priced.
Foolish final thoughts
I always consider it a bit of a warning sign when investors who usually avoid a specific area begin to snoop around simply because share prices have gone up. I'd be lying if I said that the run-up in energy shares and oil prices over the past year wasn't part of my initial attraction to the sector. However, the bottom line for this company is that it doesn't need rising oil prices to ensure healthy future performance. As long as oil prices stay about where they've been in the past few years, it'll do just fine. But if energy prices retreat to their late-'90s levels -- and all of the research I've seen so far suggests that it's unlikely -- the company's shares will almost definitely take a hit.
I'm not convinced that I need exposure to energy stocks for my portfolio to perform well. To a certain extent, that skepticism is costing me money; shares of this particular energy company are up more than 14% since being recommended. However, if I wrap up my research and find that the company's competitive position is solid and that the industry's fundamentals remain intact, there should be room for a fair amount of future growth for this Stocks 2006 pick.
Look further into the Fool's crystal ball:
Costco and PetSmart are Motley Fool Stock Advisor recommendations. Chunghwa Telecom is a Motley Fool Income Investor recommendation.
Nathan Parmelee owns shares in Costco, PetSmart, and Chunghwa Telecom but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
