Did Ovintiv Signal The Bottom For Canadian Energy Stocks?
On October 31st Canadian energy company Encana Corporation poured more salt on the wounds of the oil and gas industry by announcing that it will be moving it's headquarters to Denver and will change it's name to "Ovintiv".
No, they aren't selling a new hair loss formula or a healthy breakfast drink, they're still in the oil and gas business but will be focusing their efforts south of the border.
As an investor who has watched the sector struggle for more than five years, this felt like the type of event that could cause capitulation among oil and gas investors.
Capitulation or giving up, is usually what needs to happen in order for a beaten up sector to bottom in earnest.
I've been observing the destruction of oil and gas stocks since 2014 when prices started to crumble. However, hope is hard to crush and energy investors were quick to write it off as just another fantastic opportunity, causing many to buy far too early.
Here we are five years later and most energy names are still trading lower by well over 50% and many trading at levels never seen before.
Canadian politics has given foreign investors more than enough reason to stay away and in some cases flee the sector entirely, but now it seems that even the most staunch energy investor has thrown in the towel.
Many of those who have worked and invested in the industry for over two decades no longer want to talk about oil and gas stocks. They liked them a couple years ago at higher levels and now it seems they want nothing to do with them. I'm sensing a total loss of hope.
However, this could be the moment contrarian investor's dream of. A very legitimate opportunity to buy when there's "blood in the streets".
Buying what is hated and forgotten about goes against our natural instincts but is often the best way to realize outsize gains.
To be a successful contrarian investor you can't just blindly buy into a falling knife situation, but instead be patient and wait for a couple key signs.
One sign being extremely low valuations. As you can see from the chart below (from Canoe Financial), we have reached a point where valuations are far below average and most cases below the 2008 lows.
The other key factor, and most important in my opinion, is the improving price action in the face of negative news and sentiment.
As you can see below we've seen some very healthy gains from energy stocks since Encana's announcement on October 31st.
In my experience some of the best investments are the hardest to make. Going with the crowd and buying what feels good usually means you are closer to a top than a bottom.
Contrarian or "blood in the street" investing situations don't come around very often, especially in a stock market that has been going up for over a decade. Finding value and lopsided reward to risk opportunities has not been easy.
At some point institutions and foreign investors will become less gun-shy towards the Canadian energy sector and will begin investing once again. This could cause stock prices to escalate very quickly and the Canadian energy trade could get crowded very fast.
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