‘Dividend aristocrat’: Investors are getting more bullish on this sector, naming stocks to buy

Published Wed, Aug 23 20237:57 PM EDT

Fund managers and other investors are getting more bullish on the energy sector. BofA said in an Aug. 15 that peak interest rates have "marked a macro shift back into commodities." And hedge fund manager David Neuhauser of Livermore Partners told CNBC's " Street Signs Asia " that the "best asset class" is oil stocks. Typically, in a recession, oil prices could dive to $50 a barrel, he said. But he doesn't think the global economy will experience a very "sharp and sudden" downtrend, thanks to the "buoyancy of the consumer," he said last week. "Then realistically, you know, you can see oil prices that only hold this sort of band of $80, $85 a barrel but you can actually see it start to head towards triple digits again," he said last week. "And again, that would cause a lot of issues to the Fed that is, of course, trying to come out and and win an inflation fight. So I think at some point in time, the Fed has to determine whether or not they're trying to save the economy, or they're trying to truly fight inflation." Stocks to buy Neuhauser said Livermore owns small-cap energy stocks Kolibri Global and Vista Energy — because of limited supply and strong returns on capital, as well as low valuations. He also favors larger miners such as Glencore for value. David Dietze, senior investment strategist at Peapack Private Wealth Management, said his top pick in the energy sector is Exxon . "The company is arguably the best integrated energy company, with operations in exploration, transportation, refining, marketing, and chemicals," he said. He also noted that its dividend yield, at 3.35%, is more than twice the market's. "That has plenty of room to grow, as it's just 29% of its profits. And grow it has in the past, as it's a Dividend Aristocrat, having grown that dividend for 40 years in a row. Debt is low," Dietze said. Mizuho upgraded Chevron to a buy rating last week , saying the U.S. energy giant will benefit from higher prices. It also raised its price target for the stock from $205 to $209. That represents around 31% from Wednesday's close. Inflation protection On top of the "macro shift" to commodities, "micro energy sector fundamentals have improved too, with supply dynamics triggering a rally in energy prices from crude oil to refined products," BofA said in the Aug. 15 note. The bank did caution, however, that a sustained rally requires better demand. "While better energy demand conditions could trigger a rally in both oil and gas prices over the coming months, we also note that there are buffers that could eventually cap the ongoing rally in energy prices," it said. For one, Saudi production could revert to 9.5 million barrels per day in 2024. The kingdom announced in early August that it would extend a voluntary oil output cut of 1 million barrels per day for another month to include September — making its daily production around 9 million barrels per day in September. Still, energy stocks are an option for investors seeking inflation protection, Dietze said. He said energy stocks are "a far superior alternative" to Treasury Inflation-Protected Securities. "Energy is likely to be a surrogate for inflation, and the earnings yield on energy stocks beats the return on TIPs by 900 basis points," he said. Dietze noted that despite the shift to renewable energy, Warren Buffett's Berkshire Hathaway seems to be doubling down on fossil fuels, increasing its stake in liquefied natural gas facility Dominion Energy . "Is there an opportunity in the apparent disconnect?" Dietze asked. Though energy stocks didn't do well earlier this year, the S & P 500 energy subsector has since pared losses to gain 11% in the past three months, and over 2% in the year to date. That's still far from the S & P 500's nearly 16% advance. — CNBC's Michael Bloom contributed to this report.