2 Energy Stocks to Buy as Change Looms in the Market
The continued bifurcation of the financial market calls for a change in strategy, with these two positions worth considering.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The market continues to be as bifurcated as at any point in recent memory. This trading action played out again last week at the NASDAQ rose 3.2%, the S&P 500 was up 1.6% while the small-cap Russell 2000 fell by more than 1% in the same week.
That put the Russell 2000 in slightly-negative territory for 2024 even as the NASDAQ is up a bit over 17% year to date. This is not a sign of a healthy market. At some point, the tech juggernauts that have led the market higher since the beginning of 2023 will either see some significant profit taking or small-cap stocks will need to play a significant game of catch up.
If the latter scenario unfolds in the months ahead, there are many small-cap concerns worth some consideration. Today, I highlight two that are in the energy sector, which has been a considerable laggard in the market in the second quarter to date:
1. HighPeak Energy
Let’s start with E&P concern HighPeak Energy, Inc. HPK, whose stake I added to a bit last week. The stock has come down with the price of oil, which looks potentially poised for a rebound. Approximately 80% of HighPeak’s production is from crude oil and production increased some 34% on a year-over-year basis in the first quarter. Free cash flow rose a more impressive 42%. Based on the first quarter’s free cash flow run rate, the stock has a free cash flow yield in the low teens at these prices. My biggest complaint around HPK is that the options against the equity are not as liquid as I would like, making them harder to accumulate via covered call orders. The shares are down some 15% from recent highs.
2. Plains GP Holdings
I also added a few shares to my stake in Plains GP Holdings, L.P. PAGP last week. This midstream limited partnership is based in Houston, Texas, and owns and operates midstream infrastructure systems both in the United States and Canada. The company should continue to benefit from the buildout of infrastructure to support the large production growth in the Permian Basin, which has been a key driver in the United States regaining energy independence in recent years.
With the recent pull back in the entity, the shares yield just over 6.7% on an annual basis. Management has done a good job deleveraging the company and paying down debt over the past few years and recently has been buying back units at a solid pace. Its distribution is well covered by ample cash flow. The stock has come down just over 10% from where it began the quarter due to weakness in energy prices. A boring name, but a prudent one in an uncertain market.
And those are a couple of energy names for consideration as we begin a new trading week.
At the time of publication, Jensen was long HPK and PAGP.
