Oil stocks are the new FAANG

New York
CNN Business

Many investors, including Warren Buffett, are betting that rising crude oil prices are here to stay for a while. That’s a good bet, thanks to oil prices soaring from around $75 a barrel late last year to over $100 now. Almost all of the best performing stocks in the S&P 500 this year are energy stocks.

Buffett-backed Occidental Petroleum (OXY) doubled in price, making it the best performer in the index. The company will release its latest results after Tuesday’s close. S&P’s energy sector ETF (XLE) has soared more than 40% this year. Valero (VLO), Marathon Oil (MRO), Halliburton (HAL), Hess (HES) and Exxon Mobil (XOM) are also big winners.

So who needs Big Tech’s so-called FAANGs – owner of Facebook Meta, Apple, Amazon, Netflix (NFLX) and parent of Google Alphabet – when you can own a stock that actually trades with the ticker symbol FANG ? That would be oil and gas company Diamondback Energy (FANG), which has jumped nearly 25% this year as leaders of the once ascendant Nasdaq plunged. (Netflix (NFLX) fell over 70%, making it the biggest loser in the S&P 500 this year. Meta Platforms (FB) fell over 40%.)

But is it too late to profit from the black gold rush? The sector remains incredibly volatile and short sellers are increasing their bets against energy stocks, hoping to take advantage of the possibility of further price declines. Oil stocks were the market’s biggest losers on Monday when the Dow fell more than 650 points.

There is reason to believe that inflation is not going away anytime soon. The Federal Reserve is raising rates, which could support oil prices for the foreseeable future, and energy stocks and other commodity-sensitive sectors could lead the market for an extended period, just as big tech has. made over the past decade.

And as long as oil prices remain relatively high, that bodes well for earnings for major oil producers, drillers and other crude-exposed companies.

“Given soaring oil and gas prices this year, no one will likely be surprised that the energy sector posted the strongest earnings growth in the first quarter,” said Wade Fowler, senior portfolio manager at Synovus Trust Company. said in a report last week.

Other experts have noted that US energy companies are set to get a boost from many European countries cutting Russian oil due to Moscow’s invasion of Ukraine.

“As Russia remains a geopolitical pariah, the market expects Europe to increase its dependence on US energy supplies, which will benefit the US-based energy sector,” analysts said. from Morningstar’s quantitative research team in a report late last month.

Energy stocks currently represent only a small segment of the overall market, around 4.4% of the S&P 500, according to data from Bespoke Investment Group. Technology, despite its recent drop, still makes up about 28% of the index. There is still a long way to go for the oil sector to catch up.

Bespoke noted in a recent report that the gap is likely to narrow further and investors should not rule out the possibility that energy stocks may regain a more prominent leadership role in the broader market. Analysts pointed out that after the tech stock crash of 2000, energy stocks eventually matched the tech weighting, but not until 2008.

“We’re not suggesting that energy is about to come back in line with technology like it did in the mid-2000s when commodities surged after the Dot Com crash,” they said. writes the Bespoke analysts, “but it certainly isn’t impossible either.

For what it’s worth, Buffett is also making a big bet on the oilfield beyond Berkshire Hathaway’s (BRKB) investment in Occidental. Oil giant Chevron (CVX), the best performer on the Dow Jones this year, is one of Berkshire’s top four holdings.

The Oracle of Omaha firm revealed late last month that it now has a stake in Chevron worth $25.9 billion, up from around $6 billion at the end of the fourth quarter. . Only Apple (AAPL), Bank of America (BAC) and American Express (AXP) are larger positions for Berkshire.

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Felix J. Dixon