Warren Buffett Backs Energy Stocks: Insider Buying Signals Strength Ahead

Investment wizard Warren Buffett continues to show a strong preference for energy stocks, particularly visible through Berkshire Hathaway’s recent acquisitions of Occidental Petroleum (OXY). However, Buffett isn’t alone in his bullish outlook on the sector; energy company insiders have been actively buying shares, showcasing their confidence in the market. Recent reports from Vickers Insider Weekly highlight that insiders have consistently favored energy stocks over the past month, solidifying a compelling buy signal.

Buffett’s Insights on Energy Investments

Warren Buffett has made headlines with his substantial investments in Occidental Petroleum, a company he appreciates for its robust cash flow and extensive holdings in the Permian Basin. This region is known for producing oil at low costs. However, the enthusiasm around energy stocks isn’t solely driven by Buffett. Many insiders in the energy sector have begun purchasing large quantities of their company’s stock, indicating a level of confidence not easily overlooked.

Insider Buying Trends

According to Vickers Insider Weekly, the energy sector has been highlighted as an insider favorite in four out of the last five weeks as of September 16. This bullish sentiment reflects a belief that energy-sector stock prices are significantly undervalued, a condition that experts believe is only temporary. “Longer term, this is an industry that is going to grow,” says Ben Cook, portfolio manager of the Hennessy Energy Transition Investor HNRGX. Insiders appear to be taking advantage of prices that have lagged considerably compared to the overall stock market; the S&P 500 Energy Sector Index has decreased by 1.1% over the past year, while the overall S&P 500 has gained 31.7%.

Current Market Dynamics

One of the primary reasons insiders are buying is the attractive valuations currently seen in the energy sector. The enterprise value of the energy index is 6.8 times next year’s estimated EBITDA, below its ten-year average of 7.9 times. Additionally, energy stocks are generating free cash flow yields of 8% to 10%, more than double the average for S&P 500 companies, according to Robert Thummel, Manager of Tortoise Energy Infrastructure Total Return Fund TORIX.

Reasons for the Discounts

There are several reasons why energy stocks are trading at such steep discounts, according to energy-investing experts. Over recent years, energy companies have become increasingly shareholder-friendly, implementing tighter capital spending disciplines that yield strong free cash flows. As companies return capital to shareholders through dividends and buybacks, insiders signal their confidence by increasing their stock purchases. The optimistic outlook from insiders is bolstered by geopolitical factors, such as tensions in the Middle East, which could trigger higher oil prices.

Moreover, as interest rates begin to decline globally, the environment appears ripe for higher energy demand. “A growing global economy and the pursuit of improved living standards in less-developed countries ultimately mean an increased need for energy,” Cook states. This underscores the expectation of sustained energy demand even as capital discipline among US producers helps regulate supply levels.

Key Opportunities in the Sector

Experts highlight certain energy stocks that present attractive buying opportunities. Cook favors energy companies with strong balance sheets, including industries giants like Schlumberger (SLB), Baker Hughes (BKR), and Halliburton (HAL). He also mentions Exxon Mobil (XOM), Cheniere Energy (LNG), EOG Resources (EOG), and NextEra Energy (NEE) as companies with quality metrics.

Additionally, Thummel’s analysis brings attention to Chevron (CVX) as potentially overly discounted amidst excessive concerns regarding foreign investments. He also identifies Diamondback Energy (FANG) as a likely acquisition target, especially amidst ongoing consolidation in the Permian Basin.

Selected Stocks with Strong Insider Buying

Recent trends in insider buying show interest in several key energy companies, including:

• PBF Energy (PBF)
• Texas Pacific Land (TPL)
• Talos Energy (TALO)
• Matador Resources (MTDR)
• Comstock Resources (CRK)
• Global Partners (GLP)
• Hallador Energy (HNRG)
• HighPeak Energy (HPK)
• ProFrac Holding (ACDC)
• Granite Ridge Resources (GRNT)

Final Thoughts

In a volatile market, the combination of Warren Buffett’s strategy and significant insider buying in the energy sector presents a clear signal for potential investors to take a closer look. With the fundamentals suggesting a rebound is on the horizon, energy stocks may soon regain traction and present a lucrative opportunity in the coming months.