Energy could potentially be a standout trade this summer, according to Robert Schein, chief investment officer at Blanke Schein Wealth Management. He believes that a supply crunch driven by geopolitical conflicts and shipping disruptions may lead to an increase in oil prices, subsequently benefiting energy stocks. Schein considers energy stock valuations to be appealing, with multiples mainly in the low-teens range. He also highlights that companies in the sector exhibit strong cash flows and balance sheets.
The Energy Select Sector SPDR Fund (XLE) has shown positive performance, with a gain of over 12% in the first quarter of 2024, outperforming the S & P 500 during the same period. This rebound comes after a period of volatility for the fund, including a significant loss in 2023 followed by a substantial rally in 2022. Schein attributes the recent breakout in energy to a catch-up trade, noting that a rise in crude oil prices to the mid-$80 range could further benefit stocks in the sector.
Schein suggests that most investors are currently underweight on energy, presenting an opportunity for those willing to increase exposure to the sector. He recommends considering the Energy Select Sector SPDR Fund as a diversified option for gaining exposure. For those interested in individual stocks, he highlights Exxon Mobil, Chevron, and ConocoPhillips as top large-cap names within the ETF. While Chevron has not outperformed the market as clearly as the other two this year, all three stocks have buy ratings from analysts with price targets suggesting potential upside. Furthermore, Schein emphasizes the companies’ efforts in consolidation, balance sheet restructuring, and shareholder-friendly initiatives such as buybacks.
In Schein’s view, the strong fundamentals of these large-cap energy companies, including solid valuations, cash flow, and dividends, position them well for potential growth. He anticipates that their focus on shareholder value and financial stability will continue to support their performance, particularly in challenging market conditions. As energy prices remain volatile and geopolitical tensions persist, these companies may offer stability and growth opportunities for investors seeking exposure to the sector.
Overall, while energy stocks have faced uncertainties and market fluctuations in recent years, Schein’s analysis points to a potential resurgence in the sector driven by supply-demand dynamics and market trends. By carefully evaluating the investment landscape and considering the unique opportunities presented by the energy sector, investors may find value and growth potential in this asset class.