I’m Buying Another Dirt-Cheap Energy Stock

Energy has been on quite a run.

The Energy Select Sector SPDR Fund (XLE), a proxy for energy stocks, has rocketed 65% higher this year.

Yet energy stocks still account for much less of the S&P 500 than normal. You can see this in the next chart. From January 1990 to January 2022, energy made up 8.6% of the index, on average.

As I write, energy makes up 5.1% of the S&P.

  • Energy stocks could easily soar much higher from here…

If they returned to their historical average market weight, all else equal, they would be 60% higher than current prices.

Of course, there is no cosmic force saying energy must make up 8.6% of the market. But there is a bottoms-up, fundamental reason I expect that to happen again: Energy stocks are too cheap.

Oil supermajors Exxon Mobil (XOM) and Chevron (CVX) both trade for 12 times analysts’ estimates for 2023 earnings per share. Pioneer Natural Resources (PXD) trades for 10 times. And Diamondback Energy (FANG) trades for 7 times.

That’s all well below the average S&P 500 forward earnings multiple of 17 times. Meaning energy stocks are much cheaper than your average stock, despite their recent runup.

One way to play this trend is to buy an energy index fund and call it a day. But when you buy an index, you get the average returns. Okay, but not great.

  • Regular readers know I prefer to pick individual stocks…

It’s the best way to capture the most upside.