We're making another energy stock buy as the entire sector goes on sale

Published Mon, Apr 25 202212:17 PM EDT

We're buying 300 shares of Coterra Energy (CTRA) at roughly $27.33 each. Following Monday's trade, the portfolio will own 1,400 shares of CTRA, increasing its weighting in the portfolio 1.25 % from 0.98%. Oil stocks were getting hit hard Monday, with the per-barrel price of American benchmark West Texas Intermediate crude falling to a roughly two-week low. The driver was mounting demand concerns related to the prolonged Covid lockdowns in China and the impact rising interest rates by the Federal Reserve will have on the U.S. economy. While it's important to be mindful of these twin risks, our view Monday is that the selloff in oil and energy related equities represents a buying opportunity because supply is so tight that any near-term impact to demand could be short-lived. We added to our position in oilfield service giant Halliburton (HAL), shortly after Monday's opening trade on Wall Street. We believe higher energy prices — even at $90 per barrel for WTI crude — is supportive of increased activity. Additionally, the pivot to short-cycle investments has created a more sustainable upswing for the industry. Within the broad selloff in energy-related equities Monday, we also view the pullback in the disciplined, free cash flow returning exploration and production names, such as Coterra Energy, as an opportunity to lock in their attractive dividend yields. As a reminder, Coterra Energy is committed to returning at least 50% of its free cash flow back to shareholders via its fixed plus variable dividend. Based on the consensus 2022 free cash flow estimate on FactSet of roughly $3.38 billion, we estimate that at CTRA's current price of roughly $27 per share, the stock's dividend yield is a roughly 7.7%. We think a large and safe dividend yield well north of 7% is very attractive in a volatile market where the Fed needs to aggressively raise rates to fight inflation. That's why we are adding to our Coterra Energy position Monday. We also want to note that CTRA is trading lower Monday after analysts at Susquehanna downgraded the stock to neutral. Even though they increased their price target to $32 per share, the analysts lowered their rating due the stock's impressive run year to date and the subsequent closing of the valuation gap with peers Although CTRA is no longer as cheap as it once was, we argue that it's hardly expensive trading at roughly 4x enterprise value to 2022 earnings before interest, taxes, depreciation, and amortization. (Jim Cramer's Charitable Trust is long CTRA See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

The Permian Basin oil field in Stanton, Texas, on March 12, 2022.

Joe Raedle | Getty Images