The common theme among top-performing stocks in the S&P 500

The top-performing S&P 500 stocks of 2022: Occidental Petroleum (+99%), Valero Energy (+57%), Coterra Energy (+54%), Marathon Oil (+48), Halliburton (+46%) and Hess Corp (+44%).

The common theme among them: Oil and energy.

What’s the big deal? Since oil prices plunged at the start of COVID, prices have rebounded over 4x — with strong returns from energy stocks.

And unlike many tech stocks, oil has managed to hold on to those returns… so far.

• But oil is cyclical — falling and rising as the economy moves between expansionary and contractionary periods.
• Catch the start of the cycle and benefit from a long period of gains — hold on for too long and risk losing your gains.

We’re two years into rising oil prices — when can we expect prices to reverse?

What valuations say: Per WSJ, prices are still cheap based on historical valuations — using EBITDA multiples of the Energy Select Sector SPDR Fund (NYSE:XLE):

• Valuations in the Energy sector are still below their 10-year averages by nearly 20%.
• Compared to the S&P 500, the Energy sector’s valuation is still 52% lower than the S&P 500.

Energy stocks can still rise further before being considered fairly valued by historical standards based on valuations.

Upside potential: Despite delays from negotiations, a full European Union ban on Russian oil is still on the table — which could send prices up even further. A reversal in China’s lockdowns would also add extra oil demand.

Don’t count on an increase in oil production to bring prices down.

• Oil companies are still reluctant to increase production — fearing a 2014 repeat when prices crashed after increasing production and flooding the market with supply.
• Why invest in production when oil execs enjoy rocketing profitability and returns to shareholders via dividends and buybacks?