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Power stocks a great buy?

Key takeaways

  • Oil prices could stay elevated for the foreseeable future.
  • Global power demand has continued to skyrocket.
  • US energy and utility stock prices remained cheap relative to most other sectors.

Stocks in the energy and utilities sectors sit at the nexus of ever-changing energy costs, surging global power demand, shifting energy production dynamics, and a range of other factors. As markets have heated up to record highs, investors may want to consider that these stocks appear to represent one of the best values in the market today based on earnings multiples.

Will energy power up?

While a 7% year-to-date price gain for energy stocks thus far in 2024 might be considered strong most years, that compares with a 17% gain for the S&P 500 year to date. This follows a 3% decline for energy stocks during 2023. Over the longer term, energy (and utilities) have underperformed the S&P 500, and have far underperformed more cyclical sectors.

Source: FactSet, as of August 14, 2024. The 3 benchmarks have been indexed to 100.

Why have energy stocks underperformed recently?

Energy is a competitive, capital-intensive sector that tends to rise and fall with the broader economy. Even though US GDP growth has been robust, lingering potential recession concerns have contributed to the volatility in energy stocks over the past several years. There has also been a clear investor preference for tech and other high-growth sectors. These factors, among others, have helped put a cap on momentum for energy stocks.

But there's a bright side. Because energy stocks have not run up as much as some other sectors during this bull market, and because the sector's fundamentals generally remain sound, it is currently one of the most attractively priced. The price-to-earnings (P/E) ratio for the S&P Energy Select Sector Index is low (i.e., more attractive) relative to the current S&P 500 P/E ratio as well as to its own long-term historical P/E ratios. Additionally, dividend yields in the energy sector (as well as the utilities sector) are broadly among the highest across the market.

Maurice FitzMaurice, manager of the Fidelity® Select Energy Portfolio (), notes that many oil and gas stocks offer free cash flow yields in the high single digits, compared with roughly 3% to 4% for the S&P 500. "I think this may help support strong dividend yields in the greater-than-3% range for oil and gas stocks, plus the opportunity for stock buybacks," says FitzMaurice. Stock buybacks can accelerate future growth in earnings and dividends per share.

Fund top holdings1

Top-10 holdings of the Fidelity® Select Energy Portfolio (), as of June 30, 2024:


  • 25.1% – Exxon Mobil ()
  • 6.0% – Cenovus Energy ()
  • 5.2% – Schlumberger (
  • 4.9% – Chevron ()
  • 4.7% – Marathon Petroleum ()
  • 4.7% – Canadian Natural Resources ()
  • 3.9% – Occidental Petroleum ()
  • 3.8% – Valero Energy ()
  • 3.8% – Cheniere ()
  • 3.4% – Hess ()
(See the most recent fund information.)

Another critical factor to consider when investing in oil stocks is oil prices (obviously). Energy stocks tend to rise when oil prices rise, and they tend to fall when oil prices fall. Oil prices have increased thus far in 2024, helping bolster most energy stocks (it's worth noting that US natural gas prices are down). Global investment in oil production has picked up a bit recently after remaining low for nearly a decade, but it will take several years for new supply to come online. That, plus multiple geopolitical conflicts across the globe, are reasons to think oil prices may have a floor under them.

FitzMaurice thinks that any potential changes in government policy are likely to play less of a role compared with slowed US oil production and OPEC market intervention. "This could keep oil prices supported in the $75 to $90 per barrel range," Fitzmaurice adds. West Texas crude oil traded near $78 per barrel, as of mid-July. "Key OPEC producer Saudi Arabia aims to maintain high oil prices to fund government spending priorities, and ongoing geopolitical tensions in the Middle East could lead to supply disruptions from some producers."

If you are interested in exploring the energy sector, here are 5 energy-sector common stocks from the Fidelity.com Stock Screener with a market cap of at least $56.4 billion, a dividend yield of at least 2.4%, and a P/E ratio under 14.6, sorted by market cap, as of August 15, 2024:

  • Exxon Mobil ()
  • Chevron ()
  • ConocoPhillips ()
  • Canadian Natural Resources ()
  • EOG Resources ()

A consideration when adding individual stocks to your portfolio is concentration risk within a particular sector or industry. Concentration risk is essentially putting your eggs in a single basket—if you are not diversified across the rest of your investments.

Power surge across sectors

Utilities are another power-related sector with attractive multiples and big dividends. Power prices have increased significantly in recent years, as surging global demand for energy has ramped up with Earth's population tipping past 8 billion last year. That could help underpin strength for utility stocks.

NextEra (), the largest power company in the US by market cap, has forecasted that US power demand alone will grow 4 times faster over the next 20 years compared with the past 20 years. Power prices have increased substantially in recent years, and it may take some time for utility companies to catch up to the supercharged demand.

"There will be increasing investment by utilities in power generation—and grid infrastructure—and I expect that to be met mostly by renewables and natural gas," FitzMaurice adds. Other factors, including the near-term possibility of interest rates going down (a positive factor for the utility companies, which rely heavily on borrowing) and the sector's defensive characteristics as a bulwark against any potential economic slowdown, could make an electrifying backdrop for utilities.

Here are 5 utility common stocks from the Fidelity.com Stock Screener with a market cap of at least $10 billion, a dividend yield of at least 3.7%, and a P/E under 21.9, sorted by market cap, as of August 15, 2024:

  • Duke Energy ()
  • Exelon ()
  • Xcel Energy ()
  • WEC Energy ()
  • Entergy ()

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. 1. Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top 10 holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.

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The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Energy Select Sector index comprises those companies included in the S&P 500 that are classified as members of the energy sector, with capping applied to ensure diversification among companies within the index. The S&P Utilities Select Sector index comprises those companies included in the S&P 500 that are classified as members of the utilities sector, with capping applied to ensure diversification among companies within the index. The Fidelity stock screener is a research tool provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert Screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these Screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

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