The stocks to buy — and sell — if oil hits $100, according to JPMorgan

Published Thu, Oct 7 20219:59 AM EDTUpdated Thu, Oct 7 202110:32 AM EDT

Energy is the top-performing S & P 500 sector this year as oil and natural gas prices rebound. JPMorgan has identified the companies that will win or lose as fuel costs jump. "We remain constructive on equities and continue to highlight Energy as one of our favorite sectors," JPMorgan head of U.S. equity strategy Dubravko Lakos said in a note to clients while noting the group lags its peers on a longer-term basis. "Energy offers attractive risk/reward with improving fundamentals, increasing capital return, as well as low valuation relative to the market," the firm said. With this in mind, the firm compiled two baskets of stocks: the oil outperformers and the oil underperformers. Each list is comprised of high-conviction ideas that stand to win or lose if oil reaches and stays above $100 per barrel. West Texas Intermediate crude futures , the U.S. oil benchmark, traded around $77 per barrel Thursday. Earlier in the week, U.S. oil broke above $79 for the first time in roughly seven years. International benchmark Brent crude also eased Thursday, but held above $80 after topping that level last week for the first time in about three years . Each contract is up more than 50% this year as demand rebounds while supply remains constrained. JPMorgan believes the market can support oil prices up to $130 given the S & P 500's low exposure to goods-producing sectors. "After years of underinvestment due to low profitability and restrictive ESG policies, we are seeing signs of supply stress across the energy complex," the firm said. ConocoPhillips , Canadian Natural Resources and Oneok are among the names in the oil outperformers basket. Each company on the list has a market cap above $1 billion. Names that are merger and acquisition targets or that are difficult to short are not included. Cenovus Energy , Diamondback Energy , Continental Resources and Marathon Oil are other names on the list. The energy sector is up 44% for the year, and every single component in the sector has registered a double-digit percentage gain for 2021. Still, the group is coming off years of underperformance as investors shunned oil and gas names. JPMorgan said that energy stocks' fundamentals look better today than they did between 2012 and 2014, when oil was around $100. The firm noted that the group generated profits around $100 billion back then, while the group could top that next year despite a lower oil price environment. "Despite expense discipline and higher margins, Energy trades at a sharper discount to the market today," JPMorgan said. "In a world where most assets have broadly rerated due to lower rates and liquidity, Energy still offers non-linear earnings growth potential for several years at an attractive valuation." While the firm believes the market can handle oil as high as $130, there will be sectors affected by rising prices. This includes companies directly tied to discretionary spending, as well as those that use energy as an input or feedstock such as airlines and trucking companies. 3M , Cummins , Pentair , United Parcel Service , FedEx , Newell Brands , Advance Auto Parts , Clorox and Walmart are among the names on the firm's "oil underperformers" list. —CNBC's Michael Bloom contributed reporting.

ConocoPhillips operation in Bohai Bay, China

Source: ConocoPhillips

Energy is the top-performing S&P 500 sector this year as oil and natural gas prices rebound. JPMorgan has identified the companies that will win or lose as fuel costs jump.

"We remain constructive on equities and continue to highlight Energy as one of our favorite sectors," JPMorgan head of U.S. equity strategy Dubravko Lakos said in a note to clients while noting the group lags its peers on a longer-term basis.