Danny Moses of ‘The Big Short’ breaks down why he likes the unloved energy sector now

Danny Moses, known for predicting the 2008 financial crisis, is now bullish on energy stocks, citing their historically low 3% weighting in the S&P 500 compared to the average of 7% and improved balance sheets following M&A activity. Despite the S&P 500 energy sector's 3% loss this year amid declining crude prices, Moses believes oil prices are disconnected from the value of energy stocks and highlighted ExxonMobil and Diamondback Energy as attractive investments due to their valuations, dividends, and stock buybacks.

Analysis

Noted investor Danny Moses, recognized for his prescient call on the 2008 financial crisis, has adopted a bullish stance on the energy sector, viewing it as undervalued despite recent underperformance. Moses highlights that energy stocks currently represent only 3% of the S&P 500 benchmark, substantially below their historical average of 7%, and he does not foresee this weighting decreasing significantly. He posits a disconnect between oil prices, with WTI crude having declined approximately 9% year-to-date to roughly $65 amid OPEC+ supply increases and demand concerns, and the valuation of energy equities. The S&P 500 energy sector itself has underperformed, registering a 3% loss this year. However, Moses emphasizes that energy companies have undergone "transformational M&A" over the last four to five years, resulting in stronger balance sheets and a more disciplined approach to capital expenditure, moving away from a "drill baby drill" mentality. He specifically recommended ExxonMobil (XOM) and Diamondback Energy (FANG), citing their relatively inexpensive valuations, growth potential, dividend payments, and share buyback programs, aligning with the strongly positive sentiment signals (0.8) for both tickers.

Key Decisions for Investors

• Investors might consider the energy sector for potential contrarian opportunities, given its current low weighting in the S&P 500 compared to historical averages and the fundamental improvements in company balance sheets and capital discipline reported.
• An evaluation of specific energy companies like ExxonMobil and Diamondback Energy could be warranted, focusing on their valuation metrics, growth prospects, and commitment to capital returns through dividends and share repurchases, as these factors underpin the bullish case presented.
• It is advisable to monitor the relationship between crude oil prices, currently influenced by supply dynamics and demand outlook, and energy stock valuations, as the perceived disconnect is a key element of the investment thesis.