Editor’s Note: This article contains updated information from a previously published story.
The energy sector has long been a staple in investment portfolios, as it provides essential services that power our everyday lives.
The sector’s historically cheap valuation in the S&P 500, energy-related geopolitical risk, and discipline on the part of both U.S. and non-U.S. producers add to the relative attractiveness of the sector, especially given the S&P 500’s recent underperformance.
In screening for the best energy stocks to buy in 2024, we included a list of traditional and renewable energy stocks that are more than $2 billion in market capitalization with high marks for profitability and consensus “buy” ratings among Wall Street analysts.
Compare the best energy stocks to buy
Methodology
The best energy stocks included above all trade on a major U.S. stock exchange and meet the following criteria:
- An Altimeter overall grade of A or B. The overall grade considers profitability, earning stability, valuation and earning expectations. Grades of B or higher for both are stocks ranked in the top quarter of nearly 5,000 stocks in Altimeter’s stock database, which indicates that these companies have strong valuations with the ability to improve returns.
- A market capitalization of at least $1 billion. Energy is a capital-intensive industry, and smaller companies are often in a start-up stage with a particularly volatile outlook. Companies with a larger established capital base are more likely to be safer investments.
- A consensus analyst rating of a “buy” rating. Some stocks have a consensus analyst rating of buy or even better. This means analysts covering the stock may have a more optimistic outlook on the company’s future performance. A stock with a rating of buy or higher could be considered less risky, and, therefore, more likely to be included in the list.
Why other stocks didn’t make the cut
The methodology requires stocks to be listed on a major U.S. stock exchange. Companies not listed on a major exchange may not meet the same regulatory requirements and can have lower liquidity, making them riskier investments and not eligible for inclusion. Other energy stocks not included in the list were not included because of the following reasons:
- Altimeter overall grade below A or B: Some stocks may not have achieved an overall grade of A or B, which takes into account profitability, earnings stability, valuation and earnings expectations. A stock with a lower grade may indicate a weaker financial position, lesser stability or less attractive valuations, making it less appealing for inclusion.
- Market capitalization below $2 billion: Some energy stocks might have a market capitalization of less than $2 billion. These smaller companies can be in the startup stage or have a more volatile outlook. Companies with a larger established capital base are generally considered safer investments, and smaller companies might not meet the criteria for inclusion in the list.
- Consensus analyst rating below a “buy” rating: Some stocks may not have a consensus analyst rating of buy. This means that analysts covering the stock may have a more cautious outlook on the company’s future performance. A stock with a rating below buy could be considered riskier and therefore, not included in the list.
Advantages of investing in energy stocks
Global energy demand will continue to grow in the long term as emerging markets like India and China become more developed. Because many investors anticipate the energy sector will fully transition to renewable sources over time, the most successful and profitable legacy fossil fuel energy stocks are trading at attractive valuations.
Not only are top legacy oil and gas stocks extremely profitable in the current climate of elevated energy prices, but many are also using a portion of those profits to invest in alternative energy or net-zero emissions initiatives, potentially preparing them to transition their businesses over time seamlessly.
In the meantime, energy sector stocks pay attractive dividend yields that reward investors for their patience.
Risks of investing in energy stocks
The energy market is cyclical, so energy sector investors must always be prepared for a sharp drop in oil and gas prices that may impact a company’s profitability. In addition, oil and gas demand declines during economic downturns, so an economic slowdown can be a potential stumbling block for the energy sector.
Funds and institutional investors beholden to environmental, social and governance principles may be unwilling or unable to invest in certain energy sector stocks. Energy companies worldwide will likely also face increasingly harsh regulatory crackdowns on their businesses by environmentalist organizations and politicians that could adversely impact operations and profitability.
Final verdict
Embarking on the energy stock investment journey may appear daunting, especially for newcomers to the financial world. Still, it has the potential to yield impressive long-term returns for those willing to embrace the inherent risks.
Incorporating a diverse mix of conventional and renewable energy companies in your portfolio caters to investors with different risk profiles. It helps mitigate overall risk by avoiding an all-in approach on a single stock.
Navigating the complex landscape of energy stocks and searching for exceptional investment prospects can be demanding. Yet the potential advantages make it a gratifying pursuit for those who successfully uncover the hidden gems.
Frequently asked questions (FAQs)
Energy stocks may not be completely safe during a recession, as energy demand can decrease due to reduced industrial activity and consumer spending.
But given the essential nature of energy in daily life, they may be more resilient than other sectors.
The sector is currently undergoing a massive transformation, with renewable energy sources increasingly taking center stage in response to global concerns about climate change and sustainability. Investing in renewable energy can be a smart choice, as the sector is poised for long-term growth due to an increasing global focus on sustainability and climate change.
That said, you should still carefully evaluate individual companies and projects, as the industry can be affected by regulatory changes, technology advancements, and market competition.
Yes, global energy demand will continue to rise in the next several decades, creating plenty of financial opportunities for the companies supplying that energy.
Investors concerned about the global energy market transitioning to renewable energy should take a diversified approach to the sector, establishing positions in both renewable energy technology companies and legacy energy companies investing in renewable and net-zero emissions initiatives.
The energy sector took a breather in 2023. But based on consensus analyst price targets, the energy sector still has more upside potential over the next 12 months than any other market sector.
Analysts see the energy sector moving forward and project 21.6% average upside from energy stocks.