It seems like a distinct possibility that the current market pullback could last for an extended period. Of course, I do not know the exact path the market will take moving forward, but the best thing we as investors can do is prepare for all the possible scenarios ahead of us, especially the worst case.
If markets rebound from here, investors can resume the strategies we were all using before, following the AI boom and owning tech stocks. However, in the case of a further downturn and even a possible bear market I have some ideas for how to get defensive and hopefully even turn a profit.
There is one sector in the market that is showing obvious outperformance over the last week, month and YTD and boasts some of the cheapest companies in the market – the energy sector. Furthermore, during the most recent bear market, in 2022, energy was a bright spot as investors rotated into real assets and held up performance of the savviest investors. Exxon Mobil (XOM), Chevron (CVX) and National Fuel Gas Company (NFG) are three energy stocks I believe can outperform in good times or bad.
Image Source: Zacks Investment Research
Chevron Stock Stages Technical Breakout
One of the world’s largest vertically integrated energy companies in the world, Chevron is a juggernaut in the sector that has put up enviable long-term returns. The company also currently pays a 4.2% dividend yield, providing a nice income for patient investors.
Chevron currently has a Zacks Rank #3 (Hold) rating, reflecting a mixed earnings revision trend. The company is expected to grow its earnings 17.7% this year and 10.1% annually over the next three to five years. At 15.2x forward earnings, CVX’s valuation is about in line with its long-term median of 13x forward earnings. While fairly valued at the time, the key catalyst which should drive the stock higher is investors seeking some sort of defensive positioning, as these mega cap energy companies boast strong business models and steady cash flows.
As an investor who follows technicals, Chevron price action is offering clear signals. After consolidating for the last two years CVX stock has broken out of its range, indicating that investors are piling into the stock. Whether the volatility in stock continues or not, CVX appears to be a compelling investment option.
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Exxon Mobil Stock Outperformed During 2022 Bear Market
Exxon Mobil, like Chevron is a mammoth company, diversified across all segments of the industry and provides investors with a steady stream of profits and dividend payments. Premier assets such as these energy companies give investors exposure to real assets, which provide critical services to the world’s economy and become especially scarce when uncertainty is on the rise.
Exxon Mobil too has a Zacks Rank #3 (Hold) rating, with earnings projected to climb 20% this year and 5% annually over the next three to five years. Exxon also boasts an even more robust balance sheet than Chevron with net assets of $270 billion and over $35 billion in free cash flow over the last 12 months.
Exxon Mobil has an impressive Free Cash Flow yield of 7%, nearly triple the S&P 500 average and well above its long-term median yield of 5.3%. With rock solid business fundamentals and a catalyst to draw in defensive investors, I think XOM should be on all investors watchlists.
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National Fuel Gas Company Stock Leads the Sector
Natural Gas and the companies in the industry seem to actually be leading the crude-centric stocks. When investors realized that the abundance of data centers coming online would likely be using natural gas to supplement their energy needs, the underlying commodity and related stocks have rallied significantly. Furthermore, the current US administration is very focused on building out the gas complex adding further positive sentiment to the industry.
National Fuel Gas Company has been on the top of the Zacks Rank for some time now, with strongly upward trending earnings revisions and a Zacks Rank #1 (Strong Buy) rating. The stock has gained nearly 50% over the last year and with strong momentum at its back shows no signs of slowing down.
Though some investors may be weary of a stock that has risen so much, NFG still enjoys a very reasonable valuation, currently trading at a one year forward earnings multiple of 11.8x. With strong price momentum, defensive characteristics and a fair valuation, National Fuel Gas Company is a stock to consider if this stock market rout continues.
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Should Investors Buy Shares in CVX, XOM and NFG?
With the market facing continued volatility, energy stocks offer a rare combination of defensive stability, attractive valuations, and strong earnings potential. Chevron and Exxon Mobil provide exposure to mega-cap energy assets with solid dividends and resilient cash flows, while National Fuel Gas Company is benefiting from rising demand for natural gas and strong price momentum.
Whether the market stabilizes or experiences a deeper correction, these energy stocks have the potential to outperform. For investors looking to hedge against uncertainty while maintaining upside potential, CVX, XOM, and NFG stand out as compelling opportunities in the current market environment.
— Ethan Feller
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Source: Zacks