Biotech Was ‘En Fuego’ — Now I've Got My Eyes on Another Market Laggard
Energy has emerged as the next value trade amid oil price weakness — and this trade setup offers double‑digit return potential
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Nine months ago, the biotech sector was one of the worst laggards in the overall market. Since then, however, mid- and small-cap biotech stocks have been "en fuego" with the State Street SPDR S&P Biotech ETF (XBI) rising nearly 75% from its April lows.
I booked large profits on this move this past week as many of my covered call holdings in the sector expired in the money on triple witching Friday. As I noted in my column on Friday, unless we continue to see a spate of M&A activity across the industry, biotech is likely to see a bout of profit-taking as we get into 2026.
I have a ton of dry powder within my portfolio thanks to Friday’s big option expiration. With that, I'm starting to build positions in another huge laggard in the market, hoping for another rebound. That would be the energy sector.
Energy has badly underperformed the market indexes as WTI crude oil prices have fallen from the high $70s in mid-January to the mid-$50s currently. Fortunately for the industry, natural gas prices, while being quite volatile, are up slightly for the year.
Natural gas, along with nuclear, are likely to be the two primary fuel sources to provide the electrical generation capacity needed for the voracious demand for all the AI data centers being constructed across the nation. And new nuclear capacity takes a very long time to bring online.
Being a contrarian, I am starting to assemble numerous positions in this lagging sector. One of these is in Devon Energy (DVN) , which should be a long-term beneficiary of increasing demand for natural gas for electrical generation and for exports. Just over 50% of Devon’s production consists of natural gas and natural gas liquids.
From a price-to-earnings and price-to-cash flow ratio perspective, Devon is trading at a significant discount to larger names such as ConocoPhillips (COP) . Free cash flow should also benefit from Devon’s current business optimization plan. These are two key reasons why JP Morgan upgraded this E&P concern from "Neutral" to "Overweight" two weeks ago.
The company’s Permian Basin productive assets should also benefit from the infrastructure being built out that is happening throughout the Gulf Coast. More miles of natural gas pipelines are projected to be brought online in 2026, than in any year since 2008, during the peak of the shale boom.
Devon has a market cap of $23 billion. In its most recent posted quarter, the company delivered around $800 million in free cash flow and bought back some $250 million of its own stock.
Finally, Devon is priced at just under 9x earnings with a 2.7% dividend yield. And I can make this value stock a bit cheaper with the following covered call trade strategy.
Option Strategy
Here is how one can initiate a position in DVN utilizing a covered call strategy. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the September $35 call strikes, fashion a covered call order with a net debit in the $31.00 to $31.20 a share range (net stock price - option premium). Liquidity is more than solid with the options against this equity.
This strategy provides downside protection of 13% over the trade’s duration, which includes three dividend payouts of $0.24 a share. It also provides upside return potential of approximately 15%, including dividends, even if the stock trades flat over its option duration.
At the time of publication, Jensen was long COP, DVN and XBI.
