RJ Hamster
Why We’re Ignoring Oil Prices and Buying Energy Stocks…
Eric Fry
Editor, Smart Money
DAILY ISSUE
Why We’re Ignoring Oil Prices and Buying Energy Stocks Instead
Tom Yeung here with today’s Smart Money.
Last Sunday evening, The Economist ran an article comparing the U.S. president’s strategy in Iran to the weather in his home state of Florida:
If you don’t like it, then wait five minutes.
Sure enough, early Monday morning, the president posted on social media that his threats to obliterate Iranian power plants “STARTING WITH THE BIGGEST ONE FIRST!” would be delayed, thanks to “PRODUCTIVE CONVERSTATIONS REGARDING A COMPLETE AND TOTAL RESOLUTION OF OUR HOSTILITIES IN THE MIDDLE EAST.”
Crude futures fell as much as 13%, before rebounding after Iranian officials said no such negotiations had taken place. They ended this week almost where they started.
These wild swings highlight why Eric and I have avoided trying to predict the exact contours of energy markets. A handful of individuals are now dictating where oil prices go, and even they don’t seem to know what’s coming next.
This is a dangerous combination.
However, there is logic behind a buy-and-hold strategy in energy and commodity stocks.
So today, I’d like to share our thoughts on this wild market, and how we’re continuing to invest.
Then I’ll show you how to apply our winning strategy to your own portfolio.
Let’s jump in…
Recommended Link
“The Next 1,000% Winners Are NOT Big-Name Tech Stocks”
To save his followers from losing all their money in the dot-com bust, Eric Fry rotated into non-tech stocks that went up 2,159%… 1,737%… and 11,237%. Today, he’s found non-tech AI Survivor stocks positioned to soar just as high when the AI Bubble pops in 2026. Watch his free video for a list of names and tickers.
Oil Moves on Every Headline
So far, we believe price discovery has been superb in oil’s spot markets – meaning prices for immediate delivery are reacting quickly and efficiently to new information.
It’s like sitting at a poker table filled with professional “sharks.” Every new piece of geopolitical news has affected oil and gas prices in exactly the way you would expect, making it virtually impossible for anyone to earn risk-adjusted returns. (This is why we’re not making bets here.)
Meanwhile, oil’s longer-dated futures markets appear less well-priced. (If we were commodities traders, this is where we would make bets.)
There’s significantly less trading in these forward financial contracts – agreements to buy or sell oil at a set price in the future. And so, prices are likely depressed right now because oil producers are selling these contracts to lock in profits, effectively adding supply to the futures market.
There are still some sharks at this table… but far fewer.
There’s also a global macro case for higher prices further out on the curve. As the same Economist article notes, there are four ways the United States can now proceed in the Middle East conflict:
- Talk. The U.S. and Iran negotiate a lasting ceasefire.
- Leave. The president could simply declare victory, as he did last June after saying Iran’s nuclear program had been “obliterated” by American strikes.
- Continue. America and Israel stay the course and keep trying to collapse Iranian regime.
- Escalate. In the riskiest option of all, the president could order a takeover of Kharg Island (Iran’s primary oil export hub), send commandos to secure the nation’s enriched uranium, mount a ground offensive, or all three.
Yet futures prices – what traders expect oil to sell for in the months ahead – are only reflecting some combination of the first and second option… and assuming that Iran will agree to play along. That means there’s some opportunity to make money in the futures market.
But the opportunity to beat the market through oil futures inefficiencies is smaller compared to the clear mispricing we’re seeing in energy stocks. Here, analysts have been glacially slow in updating their company-level forecasts.
So, we remain most interested in high-quality energy stocks.
Like these…
The Better Way to Play Energy Right Now
Most professional investors love low price-to-earnings (P/E) stocks. The lower the number, the “cheaper” a company is. All else equal, Nvidia Corp. (NVDA) at 20X earnings is a better deal than Nvidia at 50X.
Now, this creates an obvious problem. P/E ratios generally go down because the “P” (i.e., price) has fallen. And that usually signals some other trouble with the company.
But what if a P/E ratio declines because the “E” (earnings) goes up instead? And what if I told you I could almost guaranteethat it would happen?
That’s exactly what’s now happening in U.S. oil companies.
For instance, one of the leading producers in West Texas’s Delaware Basin is well-positioned to benefit from structurally improving pricing trends in the region.
However, only eight out of the company’s18 Wall Street analysts have updated their 2026 earnings estimates for this company since the U.S.-Iran war began. That means more than half of all “E” estimates are too low! (They will obviously catch up once model updates happen.)
When the other 10 analysts eventually revise their numbers, this company will see its P/E ratio drop… even though its price might not have changed. It’s among the many reasons why Eric recommends this stock in his Fry’s Investment Reportportfolio.
And it’s not the only company out there like that.
Eric recommends two other high-quality energy companies at Fry’s Investment Report that are now trading cheaper than what they are expected to earn.
In other words, the market price hasn’t caught up to their true (or updated) earnings outlook, so investors can buy them at big discounts relative to those expected profits.
When analysts update their estimates, these companies will suddenly look even cheaper because their earnings are higher. That will likely attract a wave of buying.
Now, we are not pounding the table with a bullish oil and gas take. Prices move faster than the fundamentals, so a sudden end to conflict in the Middle East will see an immediate selloff in energy markets.
However, if you do invest in energy, high-quality energy stocks provide security and upside that spot oil prices and oil futures simply do not.
Click here to learn more at Fry’s Investment Report.
Regards,
Thomas Yeung, CFA
Market Analyst, InvestorPlace
