Energy lags in past month, but traders bet on return to strength in 2022. Here’s how to play it

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Energy stocks have taken a recent pause, a breather after a red-hot rally this year.

The S&P 500 sector has fallen more than 4% since this time last month. West Texas Intermediate crude, meanwhile, has plummeted 16% over the same stretch — demand fears tied to the emergence of the Covid omicron variant and an unwinding of a surge in prices this year have put pressure on oil markets.

JPMorgan analysts, though, are confident energy can resume its leadership into 2022. The firm credited favorable commodity prices, healthy balance sheets and capital return plans as reasons to be optimistic and specifically highlighted Exxon Mobil, Phillips 66 and Suncor Energy as three of its favorites.

Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, is overweight energy and has played it through upstream companies such as Diamondback Energy. She says it’s too soon to sell that stock but she wouldn’t buy it at these levels.

We also recently added to Phillips, which is part of the JPMorgan upgrade, and I think that makes sense for a lot of reasons. The company is going through cost restructuring. They seem to be turning the corner on some of the execution problems they had. And we think that the oil boon is going to continue even though omicron has impacted the headlines,” Tengler told CNBC’s “Trading Nation” on Thursday.

Phillips 66 rose slightly on Thursday, bucking the day’s downturn for the broader sector and crude oil. Shares have underperformed this year, though, adding just 3%.

“For the U.S. to bring supply back up to levels that we saw pre-pandemic, it’s going to take to July of 2023. So I think there’s going to continue to be upward pressure on the price of oil, and I think there are still ways for you to make money in this sector,” she said.

The sector has added nearly 50% in 2021, led by stocks such as Devon Energy and Marathon Oil. WTI crude has climbed 46%.

“I don’t think investors need to overthink this,” Boris Schlossberg, managing director of FX strategy at BK Asset Management, said during the same segment. “I think you could simply stay long XLE, which has got a beautiful [3.8%] yield right now.”

The XLE energy ETF holds all the major sector stocks. It is 4% from highs set in late October.

“In fact, one of my favorite strategies is kind of a yield enhancement strategy, which is just be long the XLE and then sell a little bit out of the money calls against it, about 180 days out, to just really enhance your yield. I did that in the last six months. It’s worked out beautifully,” he said. “Owning the XLE is a no-brainer at this point.”

Disclosure: Laffer Tengler Investments holds shares in Phillips 66 and Diamondback Energy.

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