Energy stocks could potentially be a lucrative trade this upcoming summer, as suggested by Robert Schein, chief investment officer at Blanke Schein Wealth Management. He believes that the current supply crunch due to geopolitical conflicts and shipping disruptions may lead to an increase in oil prices. This, in turn, could benefit shares of energy companies, making it a potentially significant investment opportunity in the upcoming months.
It is worth noting that energy stock valuations are currently deemed “really attractive” by Schein, with multiples primarily in the low-teens range. Additionally, companies in this sector boast strong cash flows and balance sheets, further solidifying the potential for positive returns. Despite a history of volatile trading in the energy sector, recent trends indicate a rebound. For instance, the Energy Select Sector SPDR Fund (XLE) saw a significant increase of over 12% in the first quarter of 2024, outperforming the S&P 500 during the same period.
According to Schein, energy stocks have begun to break out after being previously “left behind.” He characterizes the recent shift towards this sector as a “catch-up trade,” indicating a potential surge in energy stock prices. A rise in crude oil prices, especially into the mid-$80 range, is seen as a positive sign for companies within the sector. Schein emphasized that if these companies are profitable at $70 per barrel, they stand to generate substantial profits in the $80s and $90s price range.
Currently, most investors are underweight on energy, presenting an opportunity for those looking to capitalize on this potential uptrend. Schein and his team at Blanke Schein Wealth Management are actively increasing their exposure to the energy sector. He recommends investors consider the Energy Select Sector SPDR Fund as a diversified way to gain exposure. For those interested in individual stock investments, Schein highlights top companies such as Exxon Mobil, Chevron, and ConocoPhillips. These three companies are the largest holdings within the ETF, with favorable buy ratings from analysts and anticipated growth in stock prices. Chevron, in particular, has not yet outperformed the broader market this year, presenting a possible opportunity for investors seeking aggressive growth.
One of the key advantages of these large-cap energy stocks, according to Schein, is their stability during challenging times. These companies typically support their stocks through buybacks, demonstrating a commitment to shareholders. Additionally, Schein expects these companies to have undergone significant consolidation and balance sheet restructuring, resulting in solid valuations, cash flow, and dividend payouts.
The energy sector appears to be a promising investment opportunity this summer, with the potential for significant returns. Investors may want to consider increasing their exposure to energy stocks, particularly in companies that exhibit strong fundamentals and growth potential. As always, it is essential to conduct thorough research and consult with financial advisors before making any investment decisions.