Day: October 6, 2024

With October now underway, there isn’t one single way to play the energy sector, but that’s not new. There have always been different tactics for investing in this volatile niche of Wall Street. The question is, which tactic is right for you?

Here are three of the top energy stocks to consider as you try to answer that query: Devon Energy (NYSE: DVN), Chevron (NYSE: CVX), and Enbridge (NYSE: ENB). Let’s see what makes them potential investments this month.

1. Devon Energy is like jumping in with both feet

Devon Energy operates exclusively in the upstream segment of the energy sector. That means that it produces oil and natural gas. There are very big implications in this focus, the most notable being that Devon’s top and bottom lines are almost entirely dependent on the price of the commodities it sells. Don’t underestimate how much effect this can have on the company’s stock price, financial performance, and dividend. Oil and natural gas are known for their dramatic, and often swift, price swings.

Devon exacerbates the effect by having a variable dividend policy. So when energy prices are high, the dividend will be high, but when energy prices are low, the dividend will be low. It is an elegant way of making sure that shareholders benefit directly from high oil prices. But it is not something that an investor looking to live off their dividend checks will probably appreciate.

In fact, investors shouldn’t really look at the dividend yield (currently at around 5%) as a reliable indication of the income this stock will generate over time. This stock is most appropriate for investors who believe oil prices will increase, or at least remain at about their current levels.

That said, Devon is a well-respected energy producer. It has an investment grade-rated balance sheet and exceeded its volume guidance in the second quarter of 2024. It’s expanding via acquisition, has a fairly low breakeven point (roughly $40 per barrel of oil), and has over a decade of drilling inventory. There’s a lot to like, but be prepared to ride the ups and downs of energy prices.

2. Chevron is like slowly wading into the water

Chevron also operates in the upstream, but that’s just one part of its business. As an integrated energy company, it operates in the midstream (pipelines) and downstream (chemicals and refining), as well. This diversification, along with a global footprint, helps to soften the peaks and valleys in oil and natural gas prices. Energy prices are still the driving force of Chevron’s top and bottom lines, but the business just won’t be subject to quite the severe performance swings a pure-play producer would be.

But what really sets Chevron apart from other choices in the energy sector is its balance sheet. The company’s debt-to-equity ratio is the lowest among its closest peers at roughly 0.15 times. That gives it the leeway to add leverage during energy downturns, so it can continue to invest in its business and pay shareholder dividends. Notably, the dividend has been increased for 37 consecutive years. Now add in the fact that the yield is roughly 4.3% today, and you can see why Chevron would be a good option for dividend investors looking to add a permanent position in the energy patch to their portfolios.

3. Enbridge is like only dipping your toes in

The last stock to consider is Enbridge, which is a giant North American midstream company. Midstream companies own vital energy infrastructure, which they charge their customers fees to use. There are some important facts to consider here. The energy sector can’t operate without the pipelines, storage, and transportation assets that Enbridge owns. Demand for energy is more important than the price of the commodities flowing through Enbridge’s system. And energy demand tends to remain robust even when oil prices are low. Overall, Enbridge has a long history of producing reliable cash flows.

Those cash flows support the stock’s attractive 6.5% dividend yield. That dividend has been increased annually for 29 consecutive years. If you are looking for a large and reliable income stream, Enbridge has you covered.

There’s another interesting story here, because one of the company’s main goals is to provide the world with the energy it needs. To that end, it has been expanding into the regulated natural gas utility and clean energy sectors, which together make up around 25% of earnings before interest, taxes, depreciation, and amortization (EBITDA). So not only is Enbridge a solid high-yield option in the energy patch, it’s also a hedge of sorts as the world moves toward cleaner energy options.

There are multiple ways to play the energy sector

As the trio of stocks here shows, the energy sector is not a one-size-fits-all affair. There are different ways you can invest, depending on how you want to add energy exposure to your portfolio.

The most aggressive option here is Devon Energy, the pure-play producer. Chevron is something of a middle-ground option that should hold up well throughout the energy cycle, likely continuing to pay you a reliable dividend even during industry downturns. Enbridge is a reliable cash flow generator with a big dividend yield for investors who are trying to maximize their income stream. One of these top energy picks should fit your needs if you are looking for an energy stock in October.

Should you invest $1,000 in Chevron right now?

Before you buy stock in Chevron, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chevron wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool has a disclosure policy.

3 Top Energy Stocks to Buy in October was originally published by The Motley Fool

Normally, utility stocks aren’t very exciting. But, after a magnificent 35% rally over the past year, well, the utility sector is no doubt exciting right now. In fact, some investors might be thinking that the sector isn’t worth looking at anymore. That isn’t really true if you spend a little time examining utilities like Constellation Energy (NASDAQ: CEG), NextEra Energy (NYSE: NEE), and Black Hills (NYSE: BKH) as October gets underway.

1. Constellation Energy is leading the nuclear renaissance

Clean energy is all the rage, with solar and wind power investment expanding at a rapid clip. But there’s another clean energy option that often gets forgotten, nuclear power. Constellation Energy is a competitive power company (which means it sells electricity outside of the traditional regulatory framework) with ownership stakes in 14 nuclear power stations which contain 25 nuclear power units. This is important because nuclear power is in the news, for good reasons, right now.

A private company has just been awarded government funding to reopen a shuttered nuclear power plant. Now, Constellation Energy has begun the process of reopening a nuclear power plant at Three Mile Island, with Microsoft (NASDAQ: MSFT) agreeing to buy all of the power it produces for the next 20 years. To be fair, the stock shot up after management announced the news. But if nuclear power is about to become a more important energy source, Constellation Energy is probably one of the best ways to invest directly in the future of nuclear power. If you’re interested in investing in popular trends, you should take a closer look at this utility right away.

2. NextEra Energy is growing its dividend very quickly

NextEra Energy isn’t exactly a new story on Wall Street. In fact, the story behind this stock is so well known that the shares usually trade at a premium relative to peers. But if you are a dividend growth investor, that premium could be worth paying. Why? Because NextEra Energy’s dividend has grown at a 10% annualized clip over the past one-, three-, five-, and 10-year periods.

The company is projecting that earnings growth of 6% to 8% through 2027 will keep the 10% dividend growth streak alive until at least 2026. Half that rate would be considered pretty good for a utility, so NextEra Energy truly stands out from the pack.

The reason NextEra Energy has been able to grow so quickly is twofold. First, it owns the largest regulated utility in Florida, Florida Power & Light. This foundational business has benefited from the long migration trend to the Sunshine State. More customers means more revenue and profits. On top of this solid core, NextEra Energy has built one of the world’s largest solar and wind companies. That’s the growth engine, and given the ongoing shift toward renewable power, there’s likely to be a long runway ahead for additional growth.

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If you have a value bias, you won’t like NextEra Energy. But it is hard to beat when it comes to dividend growth.

3. Tiny Black Hills is a King when it comes to dividends

There’s a good chance you have at least heard the names Constellation Energy and NextEra Energy. But you may not have heard of Black Hills, which wouldn’t be shocking given its tiny $4 billion market cap. However, if you are a dividend investor trying to live off of the income your portfolio generates, you need to dig into Black Hills’ story.

It is a fairly boring regulated natural gas and electric utility that serves 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Notably, its customer base is growing nearly three times faster than the overall U.S. population. Black Hills expects this customer growth to support earnings growth of between 4% and 6% a year over the foreseeable future. As a result, the dividend should grow along with earnings over time.

This is where the story gets interesting because Black Hills has increased its dividend annually for 54 consecutive years. That makes this small fry a Dividend King, one of the few utilities to have achieved this impressive feat. Now add in a dividend yield of 4.2%, which is above the roughly 2.9% average for the utility sector and near the stock’s highest yield levels over the past decade.

Black Hills stock has rallied, just like other utility stocks have. But it still looks like this reliable dividend payer is on sale. If you rely on the income your portfolio generates, this boring Dividend King could be a great addition to your portfolio in October.

There are still interesting options in the utility patch

To be fair, the utility sector’s rally has reduced the attractiveness of the sector from a big-picture perspective. But that doesn’t mean there aren’t interesting opportunities if you dig a little deeper. Constellation Energy could be a huge beneficiary of what seems like a burgeoning nuclear renaissance, while NextEra Energy remains a dividend growth machine.

And Dividend King Black Hills is still adding years to its incredible dividend streak despite having a yield that is attractive compared to the utility sector and its own history. One of these unique stories is likely to tickle your fancy if you are looking for a utility stock to buy right now.

Should you invest $1,000 in Constellation Energy right now?

Before you buy stock in Constellation Energy, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Constellation Energy wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Reuben Gregg Brewer has positions in Black Hills. The Motley Fool has positions in and recommends Constellation Energy, Microsoft, and NextEra Energy. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

3 Top Utility Stocks to Buy in October was originally published by The Motley Fool

The biggest winners in the stock market over the last two years have all been great companies fueling the biggest innovations in artificial intelligence (AI).

Nvidia is the poster child of big AI stock winners. Its GPUs are essential equipment for training and running large language models. It has seen its stock climb 865% over the last 24 months, leading to a 10-for-1 stock split in June.

Nvidia was far from the only AI-fueled stock to split shares this year. It was joined by Broadcom, Super Micro Computer, and Lam Research, which all executed splits.

A stock split isn’t necessarily a catalyst for a stock to zoom higher. The fundamental value of a company doesn’t change when management decides to split its shares. And in today’s age of fractional shares, it only has a minor impact on making the stock more accessible to small investors.

But a stock split is a sign of confidence from management that shares will continue to climb, and few people have more insights into the future of a company and its stock than management.

So, investors are rightly interested in what could be the next stock to undergo a split. One company essential to the supply of AI semiconductors looks like a great candidate: ASML Holding (NASDAQ: ASML). And at today’s share price, investors should be looking to buy the stock before it announces a split.

An essential part of the supply chain

ASML builds and services photolithography machines, which semiconductor manufacturing companies use to produce the chips designed by companies like Nvidia. Basically, without ASML’s machines, there are no AI chips.

It’s the only supplier of extreme ultraviolet lithography (EUV) machinery, a necessary technology for printing the most advanced chips, such as those used in AI data centers for training and running large language models. If a manufacturer is printing a high-end semiconductor, it’s using ASML’s machines.

Customers include Taiwan Semiconductor Manufacturing, Intel, and Samsung. All three revamped their foundries about a decade ago to accommodate ASML’s machinery.

But the company isn’t reliant on selling more machines every year to fuel revenue growth. It receives ongoing revenue from servicing machines already in use and selling replacement parts. The recurring revenue from servicing should grow as more machines are installed in chipmakers’ foundries.

ASML’s revenue from its installed base has grown significantly faster than its system sales over the last 15 years as foundries add more of its equipment to their operations while maintaining and updating old equipment. And given the long lifespans of ASML’s machines (25 to 30 years), that’s a steady and growing source of high-margin revenue.

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Newer machines using the latest EUV technology will go into service next year. And the increased complexity of the high-end machines could result in even greater revenue from service and replacement parts relative to older machines.

The future looks bright

ASML referred to 2024 as a transition year. It doesn’t expect any revenue growth, and it forecasts gross margin contraction this year as it gears up to sell its latest EUV machines.

That stands in stark contrast to a company like Nvidia, which has seen revenue and profits continue to soar in 2024. So it’s no wonder investors haven’t been nearly as excited about ASML as they are about big-name chipmakers.

But that could be an opportunity for patient long-term investors. ASML expects 2025 to be a big year. Management’s outlook calls for between 30 billion and 40 billion euros ($33.17 billion to $44.2 billion) in revenue next year as foundry openings using its newest machines go into service. At its midpoint, that represents a 27% increase from 2023.

At its investor day in 2022, management provided an outlook for sales in 2030 of between $48.65 billion and $66.34 billion. Considering that was before the AI boom really took off, it’s a good bet that revenue will come in on the high end. Management might update that outlook to a higher or narrower range at its next investor day in November.

Along with sales growth, management expects strong margin expansion. It sees gross margins between 54% and 56% in 2025 and 56% and 60% by 2030. And while it hasn’t explicitly forecast operating margin expansion, it should see good operating leverage from its research-and-development and selling, general, and administrative expenses as its revenue scales up toward the $66 billion mark.

All of that should translate into very strong profit growth. And considering the technology lead and relationships ASML already has with the largest foundries in the world, there shouldn’t be much standing in the way of achieving those numbers.

Will this be the next big stock split?

ASML currently trades around $835 per share. While that’s well off its all-time high of around $1,100, it’s still quite a lofty price. Stocks have split with far lower prices.

The company last executed forward splits in the late 1990s and the year 2000 amid the dot-com boom. With a strong outlook based on the ongoing spending to build the next generation of AI chips, ASML could be motivated to split its shares in the near future as it sees significant growth ahead.

Even without a stock split, you should consider adding shares to your portfolio. The stock currently trades around 26 times forward earnings expectations. Given the potential for strong and predictable revenue increases and margin expansion for years to come, the company should be able to produce earnings growth that more than justifies that slight premium to the overall S&P 500. And when you compare ASML’s price to other AI stocks, it’s an absolute bargain.

Should you invest $1,000 in ASML right now?

Before you buy stock in ASML, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and ASML wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

This Could Be the Next Big Artificial Intelligence (AI) Stock Split. Here’s Why You Should Buy It Before It Happens. was originally published by The Motley Fool

Nvidia achieved a $3 trillion market cap earlier this year, an impressive achievement considering that it was approximately one-tenth that size two years ago. The advent of generative artificial intelligence (AI) has drawn investors to the stock amid its lead in graphics processing units, which are essential to AI.

However, slowing growth could set Nvidia up for a fall due to its massive valuation. Such a drop would open the door for other stocks to achieve higher market caps five years from now. Considering the trends across the tech sector, these two stocks could certainly surpass it.

Taiwan Semiconductor

My choice of Taiwan Semiconductor Manufacturing (NYSE: TSM) might raise some eyebrows, given its relationship with Nvidia and its peers. As the leading manufacturer of advanced semiconductors, TSMC (as it’s known for short) plays an indispensable role in bringing AI to the world.

Unfortunately for TSMC shareholders, it has so far not benefited from the premiums that have helped its clients, such as Nvidia. The reasons are not clear although fab companies typically have not traded at high valuations. Also, TSMC operates in the geopolitically contentious Taiwan region, leading some investors to avoid it for fear of an invasion of the island.

Nonetheless, the market might not have properly assessed this risk. For one, China also depends on TSMC chips, which should make an invasion less likely. And since TSMC produces chips in Taiwan, it stands to reason that its largest clients would also face this risk, yet the market seems to overlook such possibilities in Nvidia’s case.

Moreover, if investors start discounting Nvidia, valuations could turn in TSMC’s favor. Right now, the former sells at a price-to-sales (P/S) ratio of 31, well above TSMC’s multiple of 12.

Still, TSMC also makes AI chips for companies such as Advanced Micro Devices and Qualcomm. Hence, even if Nvidia remains dominant, this competition could hurt its pricing, leading to lower revenue and multiple compression.

In contrast, TSMC’s market capitalization is around $900 billion. Hence, a doubling of its P/S ratio and a halving of Nvidia’s would give TSMC a larger market capitalization. This does not factor in the revenue growth that should benefit both companies over the next five years. However, it shows how Nvidia might not be as far ahead of TSMC as it appears.

Once Nvidia feels more of the effects of its likely unsustainable valuation, TSMC could easily be well-positioned to surge ahead of its high-profile client.

Tesla

Investors likely know electric vehicle (EV) manufacturer Tesla (NASDAQ: TSLA) best for its cars or possibly its battery technology. At a market capitalization of $835 billion, it is currently the smallest of the “Magnificent Seven” stocks.

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The Tesla Solar Roof and the Powerwall hold potential for growth, but that product category made up less than 12% of revenue in the second quarter of 2024. And the more than 830,000 vehicles the company sold in the first half of 2024 represented a 7% drop from 2023.

Its savior could be Autopilot, its self-driving technology that continues to make significant strides. It still requires human supervision for now, but Tesla and its supporters envision turning it into a lucrative subscription business once it achieves full autonomy.

So powerful is this potential that Cathie Wood of ARK Invest believes this technology will make up around 90% of earnings by 2029. By her calculations, that would take the price for Tesla stock to $2,600 per share, an approximate tenfold increase that would put the market cap at $8.4 trillion!

In such a scenario, it likely makes the valuation comparisons between Tesla and Nvidia irrelevant — the EV maker’s P/E of 73 is higher than the chipmaker’s 57 earnings multiple. Still, even if Tesla stock pulled back to Nvidia’s P/E, a tenfold increase would take the market cap to $6.5 trillion, far surpassing Nvidia’s current size.

Lastly, as previously mentioned, Nvidia could experience multiple compression as competitors eat away at some of its market share in the AI chip market. Tesla’s self-driving opportunity has yet to take off in earnest, so even partial success could supercharge the stock enough to overtake Nvidia.

Should you invest $1,000 in Taiwan Semiconductor Manufacturing right now?

Before you buy stock in Taiwan Semiconductor Manufacturing, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Will Healy has positions in Advanced Micro Devices and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.

Prediction: 2 Stocks That Will Be Worth More Than Nvidia 5 Years From Now was originally published by The Motley Fool