Why ignore oil prices and buy energy stocks instead?

Tom Young here with today Smart money.

Last Sunday evening, The Economist He published an article comparing the US President’s strategy in Iran to the weather in his home state of Florida:

If you don’t like it, wait five minutes.

Sure enough, early Monday morning, the president posted on social media that his threats to destroy Iran’s power plants were “starting with the biggest one first!” It will be postponed, thanks to “productive talks regarding a complete and comprehensive resolution of our hostilities in the Middle East.”

Crude futures fell as much as 13%, before rebounding after Iranian officials said no such negotiations had taken place. This week they finished roughly where they started.

These wild swings highlight the reasons Eric and I avoid trying to predict the exact contours of energy markets. Now there are a handful of individuals dictating which direction oil prices will go, and they don’t even seem to know what comes next.

This is a dangerous combination.

However, there is a logic behind the buy-and-hold strategy in energy and commodity stocks.

So, today I’d like to share with you our thoughts on this wild market, and how we continue to invest.

Then I’ll show you how to apply our winning strategy to your own portfolio.

Let’s jump in…

Oil moves on every address

So far, we think price discovery has been great in oil Spot markets – Which means that spot delivery prices react quickly and efficiently to new information.

It’s like sitting at a poker table full of professional “sharks”. Every new piece of geopolitical news has affected oil and gas prices in exactly the way you would expect, making it nearly impossible for anyone to achieve risk-adjusted returns. (That’s why we’re not betting here.)

Meanwhile, oil has a longer history Futures markets Show up at a lower price. (If we were commodity traders, this is where we would bet.)

There is much less trading in these financial futures contracts – agreements to buy or sell oil at a specified price in the future. Therefore, prices are likely low right now because oil producers are selling these contracts for profits, effectively adding supply to the futures market.

There are still some sharks at this table…but much fewer.

There is also a global macro case for prices to rise further down the curve. As it is Economist The article notes that there are four ways the United States can now proceed in the Middle East conflict:

1. He speaks. The United States and Iran are negotiating a permanent ceasefire.
2. Leaves. The president could simply declare victory, as he did last June after saying that Iran’s nuclear program had been “wiped out” by US strikes.
3. He continues. America and Israel remain the course and continue trying to overthrow the Iranian regime.
4. Escalation. In the riskiest option of all, the president could order the seizure of Kharg Island (Iran’s main oil export hub), send commandos to secure the country’s enriched uranium, launch a ground offensive, or all three.

However, futures prices – what traders expect to sell oil for in the coming months – only reflect a mix of the first and second options… and assume that Iran will agree to move forward. This means that there is some An opportunity to make money in the futures market.

But the chance of the market being beaten by inefficient oil futures is lower compared to the obvious mispricing we are seeing in… Energy stocks. Here, analysts have been very slow in updating their company-wide forecasts.

Therefore, we remain more interested in high-quality energy stocks.

Like this…

The best way to turn on the power now

Most professional investors like stocks with a low price to earnings (P/E). The lower the number, the “cheaper” the company becomes. All else being equal, Nvidia company (NVDA) 20X earnings is a better deal than Nvidia at 50X.

Now, this creates an obvious problem. P/E ratios generally decrease because “P” (i.e. price) decreases. This usually indicates some other problem with the company.

But what if the P/E ratio falls because “E” (earnings) rises instead? And what if I told you that I almost can Guaranteed It will happen?

This is exactly what is happening now in American oil companies.

For example, a leading producer in the Delaware Basin of West Texas is well positioned to benefit from a structural improvement in pricing trends in the region.

However, only eight out of 18 Wall Street analysts have updated their 2026 earnings estimates for this company since the start of the US-Iran war. This means that more than half of the “E” estimates are too low! (Obviously they’ll catch up once model updates happen.)

When the other 10 analysts finally revise their numbers, this company will see its P/E ratio decline… even though its price may not have changed. It’s among the many reasons why Eric recommends this stock to his company Fry investment report file.

It’s not the only company that works this way.

Eric recommends two other high-quality energy companies in Fry investment report Which is now trading at a cheaper price than they are expected to earn.

In other words, the market price has not kept up with real (or updated) earnings expectations, so investors can buy them at significant discounts compared to those expected earnings.

When analysts update their estimates, these companies will suddenly look cheaper because their earnings are higher. This is likely to attract a wave of buying.

Now, we’re not hitting the table with a bullish move for oil and gas. Prices move faster than fundamentals, so a sudden end to the conflict in the Middle East would see an immediate sell-off in energy markets.

However, if you are investing in energy, high-quality energy stocks provide security and upside that spot oil prices and oil futures do not provide.

Click here to learn more at Fry investment report.

It is considered,

Thomas Young, CFA

market analyst, Investor location