Move over, Big Tech: Oil just might be the new FAANG.
Energy stocks fell last week as oil prices tumbled. But crude prices are still up almost 20% so far in 2022, making the sector one of the few bright spots in the market this year. (In fact, an oil stock with the ticker symbol of FANG, Diamondback Energy, is up 25%).
Two top energy sector exchange-traded funds, the Energy Select Sector SPDR Fund and the iShares U.S. Energy ETF, are each up more than 45%.
Occidental Petroleum, an energy company backed by Warren Buffett’s Berkshire Hathaway, is up nearly 140% this year. That makes it far and away the best performing stock in the S&P 500. (Berkshire currently owns about 20% of Occidental, and US federal regulators recently approved a Berkshire request to take a 50% stake.)
Berkshire is also a major investor in Chevron, which is up more than 30% this year and is the top stock in the Dow. And the top ten S&P 500 stocks are all in the oil patch, including Hess, Exxon Mobil and ConocoPhillips.
Meanwhile, Facebook parent Meta Platforms, Apple, Amazon, Netflix and Google owner Alphabet are all sharply lower.
Techs aren’t the only part of the market that’s reeling. Most major stocks are in the red for this year. So are meme stocks like AMC, Bed Bath & Beyond and GameStop. Bitcoin and other cryptos have tumbled, too. That’s why the performance of oil stocks really stands out.
Some experts think that the energy stock boom is still in its early stages, despite the big move this year.
“The oil sector has long structural tailwinds behind it,” said Matt Cole, head of product and investments for Strive Asset Management. “There is a supply shortage, so there is still a bull case.”
Strive has a new US energy ETF that has the ticker symbol of DRLL. The fund is passively managed and tracks a top oil stock index. Exxon Mobil, Chevron and ConocoPhillips are the largest holdings.
Cole isn’t too concerned about the recent pullback in energy prices. He said that as long as oil costs remain elevated, energy companies should mint money.
Monday’s big meeting of the OPEC+ nations could give crude prices a lift, too. There is speculation that oil producing countries could cut crude output.
Cole is also not worried that the recent weakness in oil prices is a sign of weaker demand. Price fluctuations may be more due to a stronger dollar, which typically pushes commodity prices down. Fears of an imminent recession in the US have started to wane a bit as well thanks to a still resilient job market and a leveling off in inflation pressures.
In other words, oil prices should stay stable. This may not be a repeat of 2008, when crude prices plunged during the depths of the Great Recession/Global Financial Crisis.
“You don’t need crude prices to go up. They just need to stay sustained at a relatively high level and energy companies will be massively profitable,” Cole said.
To that end, analysts are currently forecasting that Exxon Mobil will post an annual profit of nearly $53 billion for 2022. That’s more than double last year’s earnings. Chevron’s net income is also expected to more than double, to $36.2 billion.
“Energy stocks remain the best bet because as long as oil prices stay above $80 a barrel, they’re going to continue to have record sales and earnings,” said Louis Navellier, chairman of Navellier & Associates, in a report. He also noted that the stocks are trading at fairly low valuations based on earnings estimates and also pay big dividends.
Exxon, for example, trades for less than eight times 2022 earnings forecasts, a huge discount to the broader market. The S&P 500 is valued at about 19 times this year’s profit projections. Exxon also pays a dividend that yields nearly 3.8%, compared to a yield of around 3.2% for a US 10-year Treasury bond.
Cole also said that investors should definitely be paying attention to the fact that Buffett has made a big bet on oil stocks lately.
“Buffett’s legacy has been finding profitable companies and buying them when they are extremely cheap,” he said. “And I think this is the environment for that with rising interest rates.”
