Displaying items by tag: recession

Wednesday, 09 August 2023 09:10

Energy Stocks Rally on Strong Earnings

One of the biggest surprises of 2023 has been the incredible strength of equities with the S&P 500 up 18% YTD, and many stocks and sectors actually making new all-time highs despite numerous headwinds such as high inflation, a hawkish Fed, and middling economic growth. 

Yet, this rally has seen the bulk of outperformance from the technology sector, while cyclical parts of the market such as energy have lagged. However, there are signs that this could be changing especially following the energy sector’s strong performance over the last month as evidenced by XLE’s 8% gain. 

The larger impetus for cyclical stocks has been growing recognition that the US will likely avoid a recession in 2023. Energy stocks have also had other catalysts such as strong earnings reports from behemoths like Chevron and Exxon Mobil. Additional catalysts could be supply cuts from OPEC+ and the US refilling its strategic petroleum reserve (SPR).

 The sector also remains attractive from a valuation perspective. Currently, XLE has a price-to-earnings ratio of 8 and a dividend yield of 3.7%. Compare this to the S&P 500’s price to earnings ratio of 25.8 and yield of 1.5%. 


Finsum: The energy sector has enjoyed strong performance over the last month due to a spate of strong earnings reports and increasing signs that the US will avoid a recession.

 

Published in Eq: Energy

In a piece for Marketwatch, Michael Brush covers an interesting dichotomy regarding the energy sector. Billionaires like Warren Buffett and company insiders are bullish as evidenced by their large buys since the beginning of the year. However, broader investor sentiment towards the sector remains bearish as evidenced by its low valuations and middling performance this year. 

 Brush believes that the odds favor insiders and Buffett being correct. He also notes that energy stocks are cheap relative to their price to earnings ratios on a 5-year average basis. He also sees OPEC+ cuts over the past few months as a bullish catalyst and notes some unusual factors for why they haven’t been effective in pushing prices higher already. 

He believes that another bullish factor for energy is the relatively low amount of CAPEX. In 2022, investments in oil production were 40% below 2014. This is another positive tailwind for energy prices especially as demand should continue to remain resilient given that the US has so far avoided a recession.  

He recommends seeking out energy stocks with strong patterns of insider buying, low valuations, and above-average yields and expects the sector to outperform in the second-half of the year.


Finsum: Energy stocks are exhibiting low valuations, insider buying, and aggressive buying by billionaires like Warren Buffett. 

 

Published in Eq: Energy

In an article for CNN Money, Krystal Hur covers why many Wall Street analysts continue to issue upbeat commentary and favorable ratings on energy stocks. This is despite the sector badly lagging the broader market in the first half of the year due to weakness in oil prices and underwhelming earnings results from the major oil producers. 

However, analysts continue to see value in the sector. The energy sector has a forward P/E of 10.5 which is nearly half of the S&P 500. They also like the long-term bullish case for energy given the lack of CAPEX in the space over the past decade despite continued demand growth. Additionally, this past year has seen output cuts from OPEC+ while the US has been buying oil to replenish the strategic petroleum reserve.

Currently, analysts have a buy rating on 60% of stocks in the energy sector which is the most by far. In the first half of the year, the Energy Select SPDR (XLE) was down 8% while the S&P 500 was up 15%. Some reasons are mean-reversion following the sector’s nearly 60% gain last year, a weaker-than-expected Chinese economy, and Russia and other countries finding ways to elude sanctions.


Finsum: Energy stocks underperformed in the first half of the year, but Wall Street analysts continue to remain bullish on the sector due to longer-term supply concerns and compelling value. 

Published in Eq: Energy

In an article for Reuters, David Randall  discusses the outlook for the energy sector in the second-half of the year, and why some contrarian investors are betting on a rebound. In the first-half of the year, energy underperformed the broader market despite economic growth performing better than expected, while OPEC countries embarked on supply cuts.

The major headwind for oil has been weak demand from Europe and China, resulting in oil prices that are down 10% YTD. Despite expectations of continued rate hikes in the coming months, many investors are increasing exposure to energy stocks due to attractive valuations and expectations of a pickup in economic growth. 

Supply cuts from OPEC should also support the market especially as domestic US production has also been trending lower in recent months, reaching their lowest levels since April of last year. 

On a valuation basis, the sector is quite cheap relative to the broader market with a cumulative forward price to earnings ratio of 10.4, while the S&P 500 has a forward price to earnings ratio of 19. The energy sector also pays a better yield at 3.9% vs 1.5%.


Finsum: Energy stocks underperformed in the first-half of the year following a strong 2022. Here’s why some are betting on a rebound in the second-half of the year. 

 

Published in Eq: Energy
Thursday, 06 July 2023 23:05

Energy Stocks Underperform in Q2

In 2022, the energy sector was one of the few parts of the market that delivered positive returns for investors due to higher than expected global demand while supply was impacted by Russia’s invasion of Ukraine. However, the story is much different in 2023 as the sector is down 4% YTD, while the S&P 500 is up more than 16%. 

In Q2, energy stocks also lagged the market as covered by David Meats for Morningstar. Not surprisingly, the major reason is that oil prices were down by 10% and natural gas was off by 27%. Many were caught offside by weakness in oil given cuts from OPEC over the past few months.

According to Meats, energy stocks remain overvalued as most investors continue to assume higher prices. While he is shying away from most parts of the energy sector, he sees value in oilfield services. 

He believes the global oil market will be in a small deficit over the next couple of quarters due to the aforementioned cuts from OPEC in addition to stronger than expected economic growth. In total, he expects 2024 production to be about 1.1 million barrels per day lower than 2023. 


Finsum: Energy has underperformed in 2023 despite cuts from OPEC and a better than expected economy. While most energy stocks are not attractive from a value perspective, oil services are an exception.

Published in Eq: Energy
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