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Banks VS Oil; Which Prevails?

There is no shortage of options for where you, as an investor, can put your money. For example, the S&P 500 is comprised of roughly 500 companies grouped into 11 sectors such as financials, tech, energy, healthcare etc. While a passive, risk-averse investor might simply wish to buy a piece of the entire market, it is very common for people to buy specific sectors or even certain equities within that industry. For a long-term investor who is looking to avoid risk but is still open to purchasing individual stocks, I would advise looking no farther than some of the banks here in Canada. Namely, Canada’s largest bank by market capitalization—Royal Bank (ticker: RY.TO)—has achieved annual price returns of 11.1% from Jan. 1, 2009 to June 22, 2022 (excluding dividends - for context today RBC has a dividend of about 4%). See Exhibit A

Exhibit A - RBC stock price from Jan 1, ’09 - Jun 22, ‘23

Similarly, over the same timespan, TD (Canada’s 2nd largest bank) stock has returned 11.56% per year (excluding dividends).

Exhibit B - TD stock price from Jan 1, ’09 - Jun 22, ‘23

Additionally, BMO (ticker: BMO.TO) has attained price returns of 10.4% per year throughout the period.

Exhibit C - BMO stock price from Jan 1, ’09 - Jun 22, ‘23

Finally, the price of National Bank (NA.TO) stock has appreciated by an astounding 12.7% per year since the start of ’09.

Exhibit D - National Bank stock price from Jan 1, ’09 - Jun 22, ‘23

So even if none of these stocks issued ANY dividends, shareholders of any of these four major banks over the last 13 years would have beaten the average market return (Vanguard’s S&P 500 ETF has achieved an average return of just above 10% over the same time period)! What’s more, the risk levels of these securities are relatively low; the four stocks have an average beta (a measure of the volatility of the stock relative to the overall market) of 0.97 (lowest to highest being RY.TO at 0.78 to BMO.TO at 1.15). The S&P 500 has a beta of 1.0, meaning that history has shown that these bank stocks can outperform the market while being less volatile/reactive to market swings than the market at large.

Another sector that is a regular in the headlines at the moment is oil and gas. Increased demand beginning in 2021 coupled with a lack of supply in recent months (due to the war in Ukraine and the boycotting of Russian oil exports) has sent oil prices soaring, and stocks of major players in the industry along with it. Even with fears of recession and demand destruction dragging oil stocks down over the last week, the sector is still well ahead of its S&P counterparts YTD. Many analysts believe that the supply situation is unlikely to improve anytime soon and that the prices of Crude and West Texas Intermediate will stay well above $100/barrel for the foreseeable future. This means that Oil companies will continue to have large amounts of cash on hand, which they intend to return to shareholders through large dividends (as well as pay down their limited debt), making oil and gas an attractive investment going into 2023. Investing in oil and gas; however, is more suitable for short-term investors with some knowledge of the space as the cyclical nature of the industry doesn’t tend to reward the passive investor playing the long game.

Let’s examine this idea by looking at the stock prices of major North American oil companies (also excluding dividends) over the same period from ’09 to present and comparing the returns to those of the banks.

Suncor (ticker: SU.TO) has had an annualized price return of 4.53%

Exhibit E - Suncor stock price from Jan 1, ’09 - Jun 22, ‘23

Canadian Natural Resources’ (ticker: CNQ.TO) stock price has returned 8.4% per year

Exhibit F - CNQ stock price from Jan 1, ’09 - Jun 22, ‘23

Imperial Oil (ticker: IMO.TO) has an annualized ROI of 3.2%

Exhibit G - Imperial Oil stock price from Jan 1, ’09 - Jun 22, ‘23

Exxon Mobil (ticker: XOM) has returned a measly 1.6% per year

Exhibit H - Exxon stock price from Jan 1, ’09 - Jun 22, ‘23

Clearly, the graphs of oil stocks look starkly different to those of the banks. While the charts of the bank stocks seem to show slow and steady increases in price over time, you can see that the oil stocks have plenty of sudden price swings, resulting in much more jagged-looking graphs (which look strikingly similar to a cardiogram!!). Furthermore, as pictured in the exhibits, your reward for riding out all the ups and downs that come with investing in oil and gas for 13 years is only minimal price appreciation, anyway!

Just imagine that you’re riding in the passenger seat of a vehicle; most of us would much rather have the driver take us on a smooth ride from point A to point B as opposed to a driver that piloted a choppy ride full of abrupt starts, stops, and jolts—and with the latter when it’s all said and done you haven’t even gotten close to point B! My suggestion for any long-term investor is to sit in the passenger seat and let the bank stocks drive you all the way into retirement and beyond. There are of course a small percentage of people that have experience with the oil and gas industry and have a much better chance of being very profitable by investing in it. For example, some were able get in on the action as oil companies experienced sharp upswings over the last 6-8 months, but my advice to you would be to save yourself the stress of betting on oil and to invest your money in one or more of the glorious bank stocks I’ve listed here in this article.

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