It’s been a strong 2022 for energy stocks. The S&P 500’s XLE (XLE) is up more than 40% since the start of January – far outperforming the broader market.
In June and July, overbought energy stocks retreated sharply amid recession fears and falling oil prices. The sector has since recovered much of those losses.
In a continuation of our series, “What to Do in a Bear Market,” Yahoo Finance asked experts if energy is still the place to be given the recent pullback in oil prices.
Energy stocks were the place to hide for most of the first half of the year. Should Investors Still Hold Energy Stocks?
“We still think we’re in the early stages of a longer-term period in which crude oil and natural gas prices remain fairly high by historical standards.” In practice, this means crude oil probably in the range of $80/b – $100/b (WTI) (CL=F) and at these price points, many energy firms should have strong earnings and throw away a lot of free cash flow,” energy analyst Stuart Glickman of CFRA Research told Yahoo Finance.
“Energy investors must be willing to tolerate the volatility that comes with the space. The biggest risk for energy names is a recession that hurts demand and causes prices to fall even more — in a short period of time. Recessions don’t last forever,” he added.
Energy companies’ top and bottom lines jumped last quarter. Their strong quarterly prints are expected to continue for the rest of the year.
“The strongest sales and earnings reports will be in the energy sector for Q3 & Q4 due to favorable year-over-year comparisons,” Louis Navellier, of Navellier Estimated InvestmentsYahoo Finance reports.
“Many energy stocks, such as DVN (DVN), have high dividend yields, plus low price-to-earnings (PE) ratios, so they’re also at great valuations,” he added.
What are some of the names or types of energy stocks that investors should hold?
Yahoo Finance also reached out to the president and founder of Allstarcharts.comJC Parets who gave us his energy book:
“We like to buy energy and energy stocks, especially if crude is above $88/barrel,” Paretz said.
Should investors buy the dip when it comes to energy stocks?
“Compared to 2023 forecast results, energy firms are trading at robust discounts (about 30% lower to forward EBITDA for E&Ps and about 10% lower to midstream), so we think the risk-reward balance is still is still attractive,” said CFRA Research’s Glickman, who notes that his team’s approach is guided by a 12-month time horizon.
A look at energy stocks shows that they are holding up well despite the drop in oil prices.
“Investors just missed the dip because energy stocks are exploding to the upside today and many energy stocks are up 20% to 30% in the last few weeks,” says Navellier.
Ines is a market reporter covering stocks. Follow her on Twitter at @ines_ferre