Investors may have their eyes glued to tech holdings and AI stocks, particularly with the Nasdaq up more than 36% so far in 2023. However, energy stocks are quietly staging a notable rally. That’s got investors wondering what are the best energy stocks to buy.
Investing in energy stocks is a challenging endeavor. The group can be volatile, and revenue and earnings are often tied to crude oil, gasoline and natural gas prices.
While it can be a difficult area to invest in, this group can experience periods of strong outperformance when certain factors are working in its favor. For instance, the Energy Select Sector SPDR Fund (NYSEARCA:XLE) gained more than 59% in 2022 (and had a total return north of 64%). Conversely, the S&P 500 fell over 19% for the year, while the Nasdaq tumbled 33%.
Additionally, many of these firms pay attractive dividend yields and have low valuations. So let’s get into it and look at the best energy stocks to buy now.
Best Energy Stocks: Occidental Petroleum (OXY)
Warren Buffett might say, “You got a friend in me,” if you’re buying Occidental Petroleum (NYSE:OXY). That’s because the Oracle of Omaha has bought billions of dollars worth of Occidental, accumulating a massive stake in the firm via Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B).
Buffett began significantly ramping up his purchases of Occidental in the first quarter of 2022, although he already had a position in the company. In total, Buffett’s Berkshire now owns about 25% of the firm, with its mix of common stock, preferred stock and warrants.
According to Buffett, the firm isn’t going to “buy control,” adding: “We’ve got the right management running it.”
Lower energy prices are denting the firm’s profit, but Occidental stock trades at a low valuation. Even factoring in this year’s expected dip in earnings, shares trade at just 13 times earnings.
Will Buffett be wrong on this one? Maybe, but investors have “got a friend” in Berkshire & Co.
Best Technicals: Schlumberger (SLB)
Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are the top two holdings in the XLE ETF, making up more than 40% of the fund. Interestingly, Schlumberger (NYSE:SLB) is the No. 3 holding, with a near-5% weighting.
While that pales in comparison to weighting in the ETF, SLB stock has a much better technical setup than either Exxon or Chevron. That can always change, but as of now, active investors have been plowing into this stock.
With lower energy prices weighing on some firms, Schlumberger is still finding a way to grow. Analysts expect 18% revenue growth this year and 10% next year. On the earnings front, consensus estimates call for almost 40% growth in 2023 and 22.3% in 2024.
By those measures, shares almost look cheap, trading at 18 times this year’s earnings estimates and with a near-2% dividend yield to boot.
Alternative Energy: First Solar (FSLR)
When investors think of the best energy stocks, they tend to think of oil and gas, refineries and conglomerates in the space. While many of these firms can shine in the right environment, investors tend to forget about alternative energy stocks.
One such company? First Solar (NASDAQ:FSLR).
While energy stocks did great in 2022, First Solar did even better. While the move was admittedly volatile, shares rallied more than 70% for the year. So far in 2023, shares are up almost 35% (that’s vs. an 8% dip for the XLE ETF). Lastly, while the ETF is up 24% over the past 12 months, First Solar is up more than 175%.
President Joe Biden’s Inflation Reduction Act is acting as a net positive for companies like First Solar, helping to propel the stock price higher.
Analysts expect the firm to grow revenue by about 32% in 2023 and 2024. Further, forecasts call for earnings of more than $7 a share this year (on a GAAP basis) and jump to almost $13 a share in 2024.
That leaves First Solar trading at about 27.7 times this year’s earnings and 15.5 times next year’s estimates.
On the date of publication, Bret Kenwell did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
