3 Energy Stocks You'll Wish You Bought on the Dip (Plus 2 to Avoid)

Key Concepts

• Re-industrialization of America: The structural shift requiring increased domestic energy production and infrastructure.
• Completion Services: Specialized oil/gas services (fracking, piping, concrete) required to bring wells to production.
• Uniform Accounting: An analytical framework that adjusts GAAP (Generally Accepted Accounting Principles) to provide a more accurate picture of a company's true profitability and Return on Assets (ROA).
• Picks and Shovels Strategy: Investing in the service providers and infrastructure companies that support an industry, rather than betting on the commodity producers themselves.
• Embedded Expectations: The level of future performance already priced into a stock by the market.
• ROA (Return on Assets): A key metric used to measure how efficiently a company uses its assets to generate profit.

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1. The Energy Sector Landscape

The energy sector is currently experiencing a significant shift driven by the re-industrialization of the United States and the massive energy requirements of the AI data center buildout.

• Rig Count Trends: For the first time in years, the U.S. rig count is increasing. This is not merely a reaction to geopolitical tensions (e.g., the Strait of Hormuz) but a response to long-term, structural demand for oil and natural gas.
• Economic Resilience: Unlike the 1970s, when energy stocks comprised 30% of the S&P 500 and gasoline costs consumed a large portion of discretionary income, the U.S. economy is now far more resilient. Energy stocks currently represent only about 5% of the S&P 500, and gasoline spending is a much smaller percentage of consumer income, meaning oil price volatility has a diminished impact on inflation.

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2. Recommended Buys: "Picks and Shovels" Plays

The analysts highlight three companies that provide essential services to the energy sector and have successfully pivoted to serve the AI data center market.

ProFrac (PFHC)

• Core Business: Completion services (fracking, finishing wells).
• The Pivot: ProFrac is leasing its power-generating fleet to AI data centers. These generators break even at $55–$85/MWh, a price point that data centers are willing to pay.
• Investment Thesis: The company is effectively becoming a power generation firm with stable, multi-year demand. As they divert capacity to data centers, their remaining completion services will face higher day rates due to supply constraints, potentially causing ROA to explode beyond the 5–10% currently priced in by the market.

Baker Hughes (BKR)

• Core Business: A comprehensive service provider involved in almost every aspect of oil and gas production.
• The Pivot: They are a primary supplier for LNG (Liquefied Natural Gas) export infrastructure.
• Investment Thesis: Baker Hughes is essential to the energy ecosystem. Using Uniform Accounting, the analysts estimate their ROA is closer to 15%, double what standard metrics suggest. The market is currently underpricing their potential for growth in the face of sustained infrastructure investment.

Liberty Energy (LBRT)

• Core Business: The largest player in U.S. completion services.
• The Pivot: Similar to ProFrac, Liberty is selling power capacity to data centers, particularly in Texas, where natural gas, land, and fiber optics converge.
• Investment Thesis: The market assumes Liberty’s ROA will remain stagnant at 5–6%. The analysts argue that the combination of a new investment cycle in oil/gas and stable, non-cyclical revenue from data centers makes this a "slam dunk" for future upside.

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3. Stocks to Avoid (Sells)

Joel Litman identifies two companies that are struggling due to rising fuel costs and structural headwinds.

Royal Caribbean (RCL)

• The Argument: While the company has performed well post-2020, the stock is currently priced for perfection.
• Headwinds: Rising fuel costs are a major expense for cruise lines. As consumers become more cost-sensitive, Royal Caribbean (a higher-cost product) faces margin compression. The analysts suggest that the recent price decline is not a "buy the dip" opportunity but a reflection of permanent headwinds.

JetBlue (JBLU)

• The Argument: Despite a recent "dead cat bounce" in the stock price, the company has failed to recover its ROA to pre-COVID levels.
• Headwinds: JetBlue provides a premium product at a discounted price point, which is unsustainable in an environment of high fuel costs. The analysts view the stock's recent performance as a temporary reaction to market news rather than a fundamental recovery.

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4. Synthesis and Conclusion

The energy sector is undergoing a fundamental transformation. Investors should look past the "noise" of geopolitical headlines and focus on the structural demand created by AI and domestic re-industrialization. The most actionable strategy is to invest in the "picks and shovels"—the service providers like ProFrac, Baker Hughes, and Liberty Energy—that are essential to the infrastructure buildout. Conversely, companies that are highly sensitive to fuel costs and lack pricing power, such as cruise lines and certain airlines, should be avoided, as their margins are likely to remain under pressure regardless of consumer resilience.