The days of oil being a shining beacon and leader for energy stocks is over. Its uptrend has been broken, and longer-term support levels are giving way. How much damage is inflicted and how far prices retreat remains to be seen.
There’s no denying the once bubbly sentiment for commodities like crude has shifted. China is partly to blame for sinking its own stock market with unfriendly regulation and anti-capitalistic moves.
The damage is spilling into broader emerging markets and other assets that rely on a healthy China to aid global growth. Feel free to foist the rest of the blame onto the Covid-19 delta variant, which has run roughshod through reopening plays over the past two months.
But here’s where we shift the tone. Oil is working on its seventh down-day in a row, and support looms close at $60 and the rising 200-day moving average.
We’re getting to the stage where a bounce is due. Plus, even if crude prices find a new home near the low to mid-$60s, it’s still high enough to boost revenues for energy companies. So here are my three favorite stocks to buy into the weakness:
- Energy Sector ETF (NYSEARCA:XLE)
- Exxon Mobil (NYSE:XOM)
- Devon Energy (NYSE:DVN)
On we go.
Energy Stocks to Buy: Energy Sector (XLE)
If you want to sidestep the risk of picking an energy stock that doesn’t rebound with oil, then buy the entire sector via the Energy Sector ETF, XLE. It’s a market-cap-weighted fund with heavy exposure to the biggest companies in the space. Nevertheless, its performance has been terrible over the past two months. Since peaking in June, XLE has fallen nearly 20%. What’s more, it’s down six of the past seven sessions.
But, again, we’re not shopping for energy stocks because they are so strong. Quite the opposite – we’re building bullish-leaning trades at this stage because the discount is now too big to ignore.
To respect the broken nature of the chart, I like using naked puts instead of more aggressive directional trades. That way, the odds of success are higher.
The Trade: Sell the September $43 puts for 60 cents.
We’re getting paid 60 cents per share for promising to buy the stock at $43 at September expiration. I consider this a good entry point if you like energy stocks longer-term.
Exxon Mobil (XOM)
If the 4.62% dividend yield of the energy sector ETF isn’t enough to entice you, consider buying XOM. Not only is it the largest player in the sector, but it also boasts a beefy 6.6% dividend. So even if energy stocks simply maintain their current position for the next year, you’re being rewarded handsomely while you wait.
Because XOM is such a massive weight in XLE, their price charts look very similar. The hope is that buyers finally return to carve out a bottom in Exxon’s price as oil prices stabilize near $60. Couple that with the oversold daily chart and juicy yield, and you can make a compelling case to start dipping your toes into the water.
To build a large profit range, however, let’s once again use naked puts.
The Trade: Sell the September $50 puts for 75 cents.
If XOM is above $50 at expiration, you will capture the 75 cents per share max gain. Alternatively, if XOM falls below $50, then you’ll be obligated to buy shares at an effective purchase price of $49.25.
Energy Stocks to Buy: Devon Energy (DVN)
The final consideration for today’s trio of energy stocks to shop is Devon Energy. Of all the tickers I analyzed, this one had the healthiest price chart. While both XLE and XOM both breached their respective 200-day moving averages, DVN stock remains far above its own. Additionally, it has been holding support near $24.50 like a champ while its peers have been pushing to fresh multi-month lows.
Generally, stocks that hold up best on the way down are those that lead on the way back up. While you could certainly build another naked put play here, let’s go slightly more directional with a call spread.
The Trade: Buy the October $26/$30 call vertical for $1.15.
You’re risking $1.15 to potentially capture $2.85 if DVN pushes past $30 by expiration.
On the date of publication, Tyler Craig was long XLE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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