Are energy stocks back in play after MKM recommends Chevron?

MKM Partners analyst recommended clients take advantage of a “cyclically opportunistic” stock and buy Chevron Corporation (NYSE: CVX). Does this signal a broader opportunity for other global energy companies? 

The bullish details

MKM Partners analyst John Gerdes initiated coverage of Chevron’s stock with a Buy rating and believes it has upside potential to $121 per share. The analyst justified the bullish stance by noting the company should generate $1.3 billion in free cash flow this year and see this increase nearly ten-fold to $10.1 billion next year.

Meanwhile, Chevron’s acquisition of Noble Energy will give the company complementary assets worldwide. The end result could be around $300 million in pre-tax annual acquisition synergies along with $2.7 billion of incremental value creation.

Don’t need to buy today, but you should buy

Jim Lebenthal is a partner at Cerity and a CNBC “Halftime Report” regular. As a Chevron shareholder, he said that today isn’t necessarily “the day” to go out and buy energy stocks. But investors would be wise to do so at some point — although to a certain extent.

Energy stocks make up around 3% of the S&P 500 index so it would be reasonable for individuals to have 3% exposure to energy stocks, he said. Chevron could be bought as it is a “high-quality name” as it boasts the strongest balance sheet that puts it in a position to “pick up the debris.” 

The stock also offers investors a dividend yield of more than 7% at current levels.

“Maybe you want to be 4% [exposed to energy], maybe you want 2%,” he said. “Look — whatever your energy holding is, it has to include Chevron is my opinion.”

Have your pick

Energy stocks trade in tandem with each other so it makes no difference if investors stick with Chevron, or EOG Resources Inc (NYSE: EOG) or Schlumberger NV (NYSE: SLB), Amy Raskin, Chevy Chase Trust CIO, added to the conversation.

The majority of energy stocks are all down roughly the same and it is hard to imagine a scenario where there is room for even more downside, she said. Put in perspective, the energy sector accounted for 16% of the S&P 500 index. 

In Chevron’s case, the stock has been hard hit amid the COVID-19 pandemic and poor earnings results.

“I don’t know the timing of when this will turn around, we have been underweight energy for years,” she said. 

Nevertheless, the risk to reward profile “makes sense here” at a time when capital is flowing away from the sector.