Energy stocks did incredibly well this year mostly related to the ongoing Ukraine war and it’s reasonable to believe that they’ll continue to outperform in 2023 as well, says Bryn Talkington of Requisite Capital Management.

Why is Talkington bullish on energy stocks?

That’s an interesting call since, typically, “energy” tends not to do very well in the midst of an economic downturn that looks likely in the coming year.

But Talkington sees several catalysts that could help the energy stocks keep resilient in 2023. On CNBC’s “Halftime Report”, she said:

 

I think you want to focus on the China reopening. That’s positive. Capex has been very low in this space. That’s a positive. You’ve got fiscal discipline. That’s a positive. And then a ton of free cash flow.

Energy stocks were largely underinvested for years. Therefore, a bunch of them are inexpensive to own despite the rally this year.

Which energy stocks does she recommend?

Oil climbed back above $80 a barrel on Tuesday after China said it will no longer require inbound travelers to quarantine from January 8^th. Explaining how to play the energy stocks moving forward, Talkington said:

 

You want to buy energy companies with a dividend, and you definitely want to sell calls because you could get a really good total return just with the dividend and calls even if the underlying prices don’t do anything.

A name that particularly pops out to her is Devon Energy Corp (NYSE: DVN) that’s still down more than 20% versus its year-to-date high in June.

It has a rather tempting dividend yield of 8.20% and trades at under 7 times forward.

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