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June 2, 2021, 6:20 a.m. EDT

Want to get in on hot energy stocks? Wall Street favors these 20 picks for gains up to 40%

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By Philip van Doorn

The energy sector has been the best performer in the U.S. stock market this year, but it isn’t too late to jump in, as the setup is still attractive for the reopening of the economy.

On June 1, oil prices rose to a two-year high . And an analysis by GasBuddy showed gasoline demand in the U.S. at close to normal levels, possibly poised to hit record levels this summer .

Energy recovery has a long way to go

The S&P 500 energy sector /zigman2/quotes/210600521/delayed XX:SP500.10 +0.97% was up 36% for 2021 through the end of May. (All price changes in this article exclude dividends.) That’s the best sector performance in the benchmark index so far this year.

Stretching out the timeline paints a different story:

If we look at price changes from the end of 2019 — before the coronavirus pandemic hurt demand for West Texas crude oil so badly that forward-month futures contracts dipped momentarily in the red — the energy sector is the only one not showing a significant gain.

The long-term figures are even worse, underscoring how shares of energy producers haven’t yet returned to their levels before the great oil-price crash that began during the summer of 2014.

The table includes price changes for the full S&P 500 /zigman2/quotes/210599714/realtime SPX -0.02% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.36% . The Dow was bogged down by holding both Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM +0.67% and Chevron Corp. /zigman2/quotes/205871374/composite CVX +0.57% for most of these periods until Exxon was dropped from the group of 30 blue-chip stocks in August of last year.

Economic cycle

There has been a shift to cyclical sectors of the stock market this year, as some investors have become afraid that rising consumer prices may cause the Federal Reserve to reverse its stimulative policies that have helped prop up the U.S. economy, and kept interest rates and borrowing costs down.

Consumer prices rose 0.8% during April from the previous month and 4.2% from a year earlier. That was the largest year-over-year jump in prices in 13 years .

During an interview last week, Michael Arone, the chief investment strategist for State Street Global Advisors’ U.S. SPDR exchange traded fund business, said investors should keep an eye on the labor market for signals of when the Federal Reserve might begin curtailing its bond purchases and allowing long-term interest rates to wise. He expects our current expansion cycle that favors energy stocks and other cyclical sectors to continue until early 2023.

Energy stock screen

For a list of energy stocks, it helps to expand beyond the S&P 500. The energy sector now comprises only 2.8% of the index’s market capitalization, down from 7.1% five years ago.

To broaden the list beyond the 23 stocks in the S&P 500, we began with the S&P Composite 1500 Index /zigman2/quotes/210600453/delayed XX:SP1500 +0.04% , which is made up of the S&P 500, the S&P 400 Mid Cap Index /zigman2/quotes/219506813/composite MID +1.54% and the S&P Small Cap 600 Index /zigman2/quotes/210599868/delayed SML +0.81% . That brought the full list of energy-sector stocks up to 62 companies.

Pipeline partnerships

We then added another group of energy stocks — master limited partnerships, or MLPs, which are primarily income vehicles. As limited partnerships, these investments pass income (and capital losses) from pipelines, fuel storage and transportation businesses through to unit holders, who receive K-1 forms instead of 1099 dividend forms to report income. That makes tax preparation more complicated. MLPs aren’t included in the S&P indexes.

/zigman2/quotes/210600521/delayed
add Add to watchlist XX:SP500.10
XX : S&P US
376.15
+3.61 +0.97%
Volume: 151.17M
July 28, 2021 4:55p
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/zigman2/quotes/210599714/realtime
US : S&P US
4,400.64
-0.82 -0.02%
Volume: 2.09B
July 28, 2021 4:55p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
34,930.93
-127.59 -0.36%
Volume: 347.17M
July 28, 2021 4:55p
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/zigman2/quotes/204455864/composite
US : U.S.: NYSE
$ 58.22
+0.39 +0.67%
Volume: 16.86M
July 28, 2021 4:03p
P/E Ratio
N/A
Dividend Yield
5.98%
Market Cap
$244.83 billion
Rev. per Employee
$2.47M
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/zigman2/quotes/205871374/composite
US : U.S.: NYSE
$ 101.18
+0.57 +0.57%
Volume: 8.55M
July 28, 2021 4:03p
P/E Ratio
N/A
Dividend Yield
5.30%
Market Cap
$194.45 billion
Rev. per Employee
$1.98M
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/zigman2/quotes/210600453/delayed
XX : S&P US
1,004.99
+0.44 +0.04%
Volume: 2.75B
July 28, 2021 4:55p
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/zigman2/quotes/219506813/composite
US : U.S.: NYSE Arca
$ 58.57
+0.89 +1.54%
Volume: 1,564
July 28, 2021 4:10p
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/zigman2/quotes/210599868/delayed
US : S&P US
1,329.40
+10.68 +0.81%
Volume: 285.28M
July 28, 2021 4:55p
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