Energy has been the best performing sector of 2022. While the S&P 500 (SPY) is down 20% and the NASDAQ 100 (QQQ) has fallen 31%, energy is the only sector that is up on the year, gaining 15%. Take a look at the chart below.
However, after an impressive string of gains in the last 12 months, energy stocks recently fell into bear market territory, defined as more than a 20% decline from the 52-week high. For example, the SPDR Select Energy Fund (XLE) fell about 25% from the 52-week high in June. Take a look at the 2022 chart below.
I see three reasons energy stocks were down.
- Profit taking after big gains in the last 12 months.
- Short-term volatility in the price of oil.
- Concerns about demand with pending recession.
Naturally, investors want to know what to expect moving forward – here’s my take.
Here is What I Expect Moving Forward
I remain optimistic on energy stocks and I expect the sector to continue rebounding and eventually hit new highs. Here’s why.
- Despite recent weakness, I believe the price of oil and commodities in general are in a long-term bull market, up trend.
- There is no short-term cure for inflation and higher inflation supports a high oil price.
- Supply shortages of oil, gasoline and diesel fuel support energy stocks. There is no short-term solution for low supply, it takes years and billions in new investments to bring new oil and gasoline online.
- Energy companies are reporting record revenue and earnings right now.
- Despite big gains in the last year, energy stocks look under valued because revenue and earnings have surged in the last year.
- Oil doesn’t have to stay at an all-time high for energy stocks to continue outperforming. Oil above $80 still supports strong earnings in the energy sector.
Still not convinced? Then take it from one of the most successful investors ever who has used the recent pullback in energy to buy more shares. Here are some more details from Business Insider.
Warren Buffett’s Berkshire Hathaway capitalized on the recent slump in Occidental Petroleum shares, spending $529 million to lift its stake in the oil-and-gas company to over 16%.
The famed investor’s conglomerate scooped up 9.6 million shares in the space of two days this month, paying around $55 to $56 a share, SEC filings show. The purchases boosted its position by about 7% to nearly 153 million shares, worth $8.5 billion as of Wednesday’s market close.
As you can see, Buffett views the pullback in energy as an opportunity to buy more shares and he remains optimistic that energy stocks will deliver solid gains in the next few years.
Here is the Plan Moving Forward
My plan is to keep holding shares of energy stocks, and use this bout of weakness to add more shares for clients and accounts that need them.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading. Author Michael Vodicka owns shares of the S&P 500 (IVV), NASDAQ 100 (QQQ).
