When looking for shares to buy, it goes without saying that stock-pickers with a good track record of success are worth listening to.
Billionaire investor Jim Mellon would come into that category, as he was very publicly piling into gold and silver four years ago. And unless you’ve been living under a rock, precious metals have gone through the roof since then.
Gold is up 66% in one year, while silver has skyrocketed more than 150%!
I also recall Mellon urging investors to consider dirt-cheap FTSE 100 bank stocks a while back. With Lloyds and Barclays up 111% and 212%, respectively, in the past two years, that’s also been a cracking trade.
On a recent Master Investor Podcast episode, Mellon named energy as his new favourite investing theme. And he revealed a few names in this sector that he’s been buying.
Why energy stocks?
Mellon gave a few key reasons why he’s bullish on this theme over the next few years:
- The AI data centre build-out will require an immense amount of power (perhaps an extra 20% of the current US electricity supply)
- Nuclear power won’t be ready to fill this demand for five to 10 years. In the meantime, the world must rely mainly on natural gas and oil
- Many oil majors are offering 4%-5% dividend yields
From the FTSE 100, he highlights BP and Shell. These have yields of 5.8% and 4.1%, respectively, while trading reasonably on forward-looking valuation metrics. Both continue to buy back shares.
From the FTSE 250, Mellon says he’s been buying Renewables Infrastructure Group for its mammoth 11% dividend yield. He also mentions Foresight Solar Fund, which is sporting an even bigger yield (12.2%!).
Across the pond, the billionaire likes SLB (formerly Schlumberger) As the world’s largest oil services company, it could benefit from any rebuilding of the Venezuelan oil industry.
Mellon has also been loading up on various energy ETFs.
Risks to remember
As a broad theme, I think he’s probably onto something here. Investors might want to dig into some of these names, while also recognising that this sector is cyclical and therefore very volatile.
Plus, some oil stocks could underwhelm even if the wider sector booms in future. For example, BP stock has performed poorly since the Deepwater Horizon oil spill in 2010.
Finally, dividends can be cut and future regulatory changes could negatively impact profits for renewable energy firms. And the reality is it’s still too early to know which firms will profit or not from Venezuela.
An ETF idea
Nevertheless, investors who are bullish on this theme might want to consider something like the iShares MSCI World Energy Sector UCITS ETF (LSE:WENS).
This fund gives broad-based sector exposure through 51 holdings, including Exxon Mobil, Chevron, and ConocoPhillips, as well as Shell and BP. It also holds oil services firms SLB, Baker Hughes, and Halliburton.
Of course, this ETF would underperform if the oil price slumped. But as things stand, there’s a 3.3% yield on offer, and the overall price-to-earnings ratio of the fund looks pretty cheap at around 16.
Long story short, the AI boom is arguably as much about energy as it is about compute. This ETF gives instant global diversification at a low cost, making it an attractive option worth thinking about.
