Editors' Pick: Originally published Dec. 30.
Owing to the worldwide glut of oil, pressuring supply and demand conditions for oil drillers and production companies, it seems the energy sector -- down 23% in 2015 -- was the most talked about group in the entire market this year, especially with crude prices plummeting more than 60% from 2014 highs of above $100 a barrel.
With oil prices still at historical lows, the Energy Select Sector ETF (XLE - Get Report) has lost more than 23% on the year, against a slight gain for the S&P 500 (SPX) index -- fueling sentiment that energy stocks were the most disappointing sector in 2015. Take a look at the chart.
XLE Year to Date Price Returns (Daily) data by YCharts
From the respective 18% and 17% year-to-date decline of strong brands like Chevron (CVX - Get Report) and Schlumberger (SLB - Get Report) to smaller players like EOG Resources (EOG - Get Report) (down 23%), there were no places to hide. And investors who placed long bets in offshore/onshore drillers like SeaDrill (SDRL - Get Report) and Transocean (RIG - Get Report) are drowning in losses. (EOG Resources is among the holdings of Action Alerts PLUS, the charitable portfolio managed by TheStreet's Jim Cramer).
But it's not time to give up, especially with some experts suggesting weak oil prices have bottomed and a rebound might be under way. Given how much profits and cash flow energy companies still generate, betting on higher stock prices -- despite oil prices -- can be profitable. In addition, energy companies have spent much of the past 12 months slashing capital expenses and resetting their businesses. In most cases there has been significant improvement. In that vein, one stock to consider for 2016 is Exxon Mobil (XOM - Get Report) .
While weak crude prices have impacted its largest oil and gas business, Exxon's profit margins have grown in its refining business. In its third quarter, owing to lower feedstock costs, refining profit reached $2 billion -- nearly doubled from a year earlier. And its international refining unit delivered better-than-expected earnings of $1.5 billion. With Exxon keeping its budget forecast intact, there is no signs of slowing down.
With XOM stock trading at $79, down more than 18% from its 52-week high of $97.20 and 22% from its all-time high, now's the time to buy. Combined with its strong 73-cent quarterly dividend that yields almost 3.70% annually -- some 1.7 percentage points higher than the yield paid out by companies in the S&P 500 (SPX) index -- Exxon has a lot of appeal.
Another name to consider is Valero Energy (VLO - Get Report) . Valero, headquartered in San Antonio, has seen its stock shoot up some 43% in 2015. It would seem the company has benefited from its strong refining business, which can be considered safe amid periods of weak oil prices. This is because refiners make money off the spread of oil prices -- the difference between what it cost to produce oil products, also known as the "rack." This is the wholesale price of what refiners sell out of the refinery.
In its third quarter, Valero topped Wall Street's estimates, posting 40% year-over-year jump in refining margins. For all of 2015 the company's earnings are projected to grow some 30% year over year to $8.65 a share.
Even as VLO stock trades near all-time highs of $72, those estimates drop the forward P/E to 8 -- 11 points lower than the S&P 500 index. This means the stock is cheap and has a chance to reach $90 in the next 12 to 18 months, delivering gains of around 25%. That it pays a 2.74% annual yield is an added bonus.