Energy stocks are up 6% since I posted a bullish column on the sector at MarketWatch less than two weeks ago, compared to flat returns for the S&P 500.
That’s some nice short-term outperformance. But energy stocks have more to go. Here are eight reasons why, with seven suggested names to consider owning.
8 Reasons Why Energy Stocks Go Higher
1) Insiders are bullish. I’ve tracked insider activity every day for a few decades, to inform my stock selection, and sector and market calls. Energy insiders have been buying large amounts of stock for weeks. Warren Buffett’s Berkshire Hathaway’s (BRK.B) also likes the sector. He has been making huge purchases of Occidental Petroleum (OXY). Buffett likes Occidental’s prodigious cash flow and its extensive Permian Basin holdings that help make it a low-cost producer. Insiders have been buying at small- and mid-cap companies. Since these are less well covered, I think they have more potential upside than Occidental Petroleum.
2) Energy stocks remain arguably cheap by many measures like price earnings multiples and free cash flow yields.
3) Energy companies are shareholder friendly. They have better capital spending discipline which creates strong free cash flow. They are returning a lot that cash to shareholders via dividends and buybacks.
4) Oil prices will likely go higher from here. Oil is up a lot recently because of heightened tensions in the Middle East. But oil still only has a modest geopolitical risk premium built into its prices. Next, there will be no near-term U.S. recession, and global rate cuts support higher energy prices. Besides the Fed, central banks in Europe and Canada have been cutting rates to support growth. That will boost energy demand, supporting prices. The world is making progress on renewable energy, but fossil fuels will remain a large part of the mix for decades to come, still.
5) Artificial intelligence (AI) requires a lot of computing power, which uses a lot of electricity. This demand favors natural gas (NG) producers (and also utilities providing nuclear energy, as well as uranium miners, but that is another story).
6) There is a big short position in oil. This suggests you should consider owning energy producers, if you favor making contrarian bets against the crowd, like I do.
7) China is stimulating its economy. This will boost energy demand. I was bullish on China in January in my stock letter. Since then, iShares MSCI China ETF (MCHI) is up 52%, almost triple the S&P 500 gains of 18.6%. KraneShares CSI China Internet ETF (KWEB) is up 47%. I suggested China stocks in March in my MarketWatch column. Since then, MCHI and KWEB are up 31% and 35.4%, almost triple 12% S&P 500 gains. This huge China performance is a market signal that China’s economy really is going to start to grow, which will boost demand for oil and natural gas.
8) The election outcome will be OK for energy either way. Democratic administrations are good for energy stocks because they often restrict supply. Republicans tend to promote domestic energy production. But energy company capital discipline suggests they won’t overdo it and produce so much that it drives down oil prices.
Favored energy stocks to consider owning
Besides Occidental Petroleum, insiders (including investors considered insiders because of large position size), have been buying PBF Energy (PBF), Texas Pacific Land (TPL), Talos Energy (TALO), Matador Resources (MTDR), Comstock Resources (CRK), and Global Partners (GLP). I suggest many other promising smidcap energy companies in my stock letter. You may subscribe here.
Check out my recent MarketWatch column on energy stocks here.
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