Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Energy Stocks Are the Best Hedge Against Megacap Tech
Transcript
- Lucas: So the Nasdaq is down more than three percent in the last five days, and NVIDIA alone has lost nearly eight percent. If you are running a concentrated portfolio, that kind of drawdown stings a lot more than it would in a diversified index fund. Luna: Right, because in a concentrated portfolio you don't have a hundred other names to smooth it out. So what do you do? Just sit there and take it? Lucas: Well, some stock pickers do exactly that. They have a high pain tolerance and they believe in their thesis. But I think the smarter play is to own something that tends to zig when megacap tech zags. And right now, that something looks a lot like energy stocks. Luna: Energy as a hedge? I mean, ExxonMobil is down one point four percent in the last five days. Chevron down two point three. That's not exactly a huge offset. Lucas: That's true for this exact five-day window. But look at the year so far. Through June 28, the Energy Select Sector SPDR Fund is up about twelve percent, while the Nasdaq is up roughly eight. And the correlation between energy and megacap tech has been below zero point three for most of 2026. That's not a perfect negative correlation, but it's enough to reduce portfolio volatility. Luna: Okay, so the diversification benefit is real. But there's another angle here: dividends. The S&P 500's dividend yield hit a twenty-five-year low recently, but energy stocks still yield around three point five percent on average. Lucas: Exactly. And that yield is growing. ExxonMobil has increased its dividend for forty-three consecutive years. Chevron for thirty-seven. So in a concentrated portfolio, owning a name like that gives you a cash return while you wait for the thesis to play out. Compare that to a stock like NVIDIA, which yields basically nothing. Luna: So you're not saying replace NVIDIA with Exxon. You're saying add Exxon as a stabilizer. Lucas: Precisely. I think a lot of active managers are underweight energy because it feels old economy. But the reality is that AI data centers are driving a massive increase in electricity demand, and a lot of that power is still coming from natural gas. The Energy Information Administration expects natural gas-fired generation to grow by four percent this year alone. Luna: And that directly benefits the integrated oil and gas companies. You've got Exxon and Chevron with large natural gas exposure. There's a structural tailwind here that most investors are ignoring because they're focused on the AI chip story. Lucas: Right. And that tailwind shows up in free cash flow. Exxon generated fifty-five billion dollars in free cash flow last year. Chevron did thirty-five billion. Both are using that cash to buy back stock and raise dividends. For a stock picker, that's a lot more tangible than a promise of future AI revenue. Luna: So how do you size the position? If you have a ten-stock portfolio, what's the right energy allocation? Lucas: I'd say somewhere between ten and twenty percent, depending on your risk tolerance. If you're heavily concentrated in megacap tech, maybe you lean closer to twenty. The key is to think of energy as insurance, not as a high-growth bet. You're not trying to outperform; you're trying to reduce the maximum drawdown of the portfolio. Luna: And in a selloff like this week, where the Nasdaq drops three percent, having that anchor means you can hold your tech positions without panicking. Because the portfolio as a whole isn't dropping as much. Lucas: Exactly. And there's another subtle benefit: rebalancing. If energy outperforms tech for a stretch, you can sell some energy into strength and buy more tech at lower prices. That discipline forces you to buy low and sell high, which is the whole point of active management. Luna: But what about the risk that energy gets crushed? Oil prices are notoriously volatile. If a recession hits, demand drops and so do these stocks. Lucas: That's a real risk. But the integrated companies have been through that cycle many times. Their balance sheets are much stronger today than in 2015 or 2020. Exxon's debt to capital ratio is around fifteen percent. Chevron's is about twelve. So they can endure a downturn without cutting the dividend. And if anything, a recession would hit tech earnings even harder, because tech valuations are so elevated. Luna: So it's a relative value play. Energy is cheaper, pays a dividend, and has a lower correlation to tech. That makes it a natural fit for a concentrated portfolio. Lucas: Right. And I want to emphasize that this isn't about forecasting the next move in oil prices. It's about portfolio construction. If you're building a portfolio of ten to fifteen stocks, you need to think about how they interact, not just how each one performs in isolation. Luna: And energy stocks are one of the few sectors that still trade at a discount to the broader market. The S&P 500 energy sector trades at about twelve times forward earnings, while the overall market is at twenty-two times. Lucas: That valuation gap is huge. And it's persisted for years because investors have been conditioned to think tech is the only growth game in town. But the thing is, energy companies are growing earnings too. Exxon's earnings per share grew thirty percent last year. Chevron grew twenty-five percent. That's not zero growth. Luna: And that growth is coming from higher production and better margins, not from multiple expansion. So there's less risk of a valuation correction. Lucas: Exactly. So to sum up: in this market, where megacap tech is getting hit and the Nasdaq is correcting, adding an energy component to a concentrated portfolio can reduce volatility, provide a growing dividend, and offer a cheap valuation cushion. It's not the most exciting trade, but it's a smart one. Luna: I like that. It's a grounded approach. And speaking of grounded, I think a lot of our listeners appreciate that we keep this show ad-free and focus on practical ideas. Lucas: Yeah, we deliberately don't run ads because we want the conversation to be about the ideas, not about selling something. If you find value in that, and you want to support it, you can find us at buy me a coffee dot com slash fexingo. That's a simple way to help keep this going. Luna: And it really does make a difference. Even small contributions add up and allow us to keep doing the research and having these conversations. Lucas: Absolutely. So back to energy stocks. One more thing I want to mention: think about the timing. If the Fed does hike rates later this year, as Kashkari suggested, energy stocks might benefit because they have pricing power and less dependence on cheap debt. Tech stocks, on the other hand, could get repriced. Luna: That's a good point. Higher rates discount future cash flows more heavily, which hurts long-duration assets like tech. Energy has shorter duration because the cash flows are more immediate. Lucas: Exactly. So it's a dual hedge: lower correlation, plus a duration mismatch that favors energy in a rising rate environment. For a stock picker building a concentrated portfolio today, that's a compelling combination. Luna: Alright, so next time we're thinking about adding a name, maybe we look at the energy sector first. Lucas: Yeah, it's worth a serious look. Thanks for the conversation, Luna.