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Ryan Modesto, CFA, is Managing Partner at 5i Research, a conflict-free investment research provider for retail investors offering research reports, model portfolios and investor Q&A. 5i Research provides content under an agreement with The Globe and Mail, which receives royalty compensation. Try it.

Fools rush in:

"Wise men say only fools rush in" is not just the beginning of a smooth serenade, but words of wisdom investors should take to heart. It was not long ago that commodities were one of the most hated asset classes out there. Gold had seemed to do nothing but lose investors money since 2012 and the precipitous drop in everything oil-related has scared investors out of the market and sent undiversified portfolios into the red. However, like a phoenix that rises from the ashes, gold and oil are getting their time back in the sun in 2016, with gold up 16 per cent year-to-date and oil seeming to have found some sort of bottom. So what has changed? Was it not just a few weeks ago that slower growth in China, negative interest rates around the world and the knock on effects of low oil on industrial production were about to send the global economy into a tailspin?

These factors are certainly still present, as economies do not turn on a dime. The oil picture looks a little less bleak with agreements on at least capping oil production in the works but production remains at record levels and the issue that prices are more or less manipulated should not be forgotten. Meanwhile, individuals' patient enough to hold gold have welcomed the rising price but the move seems a little counterintuitive given the sharp rise in the U.S. dollar. Maybe prices fell too far for too long or maybe markets are realizing that things aren't THAT bad. Guessing at the causes of short-term movements is next to impossible and clouds a more important consideration: how should investors get back into this sector, if at all?

The key here is to not repeat past mistakes in a portfolio. Don't be the fool rushing in and chasing returns, throwing portfolio diversification principles to the wind. Needlessly overweighting commodity sectors was what got a lot of investors into trouble and trying to time when a sector moves rarely works. Instead, stay diversified and ensure that when times are good, the portfolio has a piece of the action. All sectors will not perform well all of the time, but ensuring a portfolio is not a bet on a single industry or asset quickly moves the process from guessing to real investing and mitigates the impact any sector being out of favour has on your net worth and your stress levels. Where does this leave investors who saw energy or gold exposures dwindle to immaterial levels or couldn't take the volatility and just sold out? We are going to highlight two stocks that might provide the exposure you are looking for, without going 'all-in' on oil.

Parkland Fuel Corp (PKI):

PKI, a name we have recently added to one of our model portfolios, is a distributor and marketer of fuels and lubricants such as propane, gasoline, diesel and heating oil.  The company buys these energy products and then sells them through owned marketing channels such as retail gas stations. While not directly leveraged to oil prices, PKI offers energy sector exposure and weathered declines over the last year fairly well, being down just under 10 per cent over the last year. The real exposure comes from that of economic activity, as a lagging energy sector leads to lower fuel volumes for PKI. Parkland could be an interesting option for an investor looking for a way to be exposed to the energy sector while avoiding some of the volatility. The dividend yield of just over 5 per cent (increased in March 2013, 2014 and 2015) is a nice bonus that helps smooth out the ups and downs, as is a very impressive track record for return on equity. Parkland reports fourth quarter and year-end results on March 3, 2016.

AutoCanada (ACQ):

Suggesting a consolidator of car dealerships has a correlation to oil seems a bit odd but due to a high exposure to the province of Alberta, when the energy sector is doing well, so does Alberta, which means more people have money and more people go out to buy vehicles.  The correlation of ACQ to the price of WTI (oil) has been 0.88 over the last year, so ACQ has been an effective proxy to oil without actually being dependent on the price of oil itself. Meanwhile, the company has seemed to learn a lesson about diversification, as it is now expanding into other geographies such as Ontario in an attempt to reduce the nearly 50-per-cent revenue exposure to Alberta. ACQ is interesting because it offers an investor a chance to benefit from the rising price of oil, if it ever happens, while not being at the absolute mercy of oil prices (the company can cut costs, diversify to other provinces, etc.) in the longer term. Patience may be required with a name like ACQ but between a 5.5-per-cent dividend and $77-million in cash (15-per-cent of market-cap) while trading for less than book value, there is a lot to like here. The main risk in this stock, we think, is that a rising share price from higher or stable oil prices is lagged, causing investors to throw in the towel too soon. There will likely need to be a sustained strengthening in energy markets to see the Alberta economy pick up and flow through to decisions such as new car purchases.

It has been an unusual year for commodity markets and a great deal of uncertainty remains. Some companies may not survive if prices remain at low levels, and pending production deals may never come to fruition. Investors need to remember the lesson that has been taught in the past year, which is to not overexpose a portfolio to any single industry. There are also more creative ways to build energy sector exposure while not being directly leveraged to the price of a volatile commodity, such as through investments similar to those outlined above. Taking a prudent approach to rebuilding an energy and commodity allocation is likely a much more palatable solution for most investors opposed to rushing back into a sector that has caused so much pain within investors' portfolios.

Readers can follow @5iresearchdotca on twitter to get timely updates on dividend initiations, increases and cuts in Canadian markets.

Please perform your own due diligence before making investment decisions.

In order to remain truly conflict-free, the writer and employees of 5i Research cannot take a position in individual Canadian equities.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 4:46pm EDT.

SymbolName% changeLast
PKI-T
Parkland Fuel Corp
-0.3%42.99

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