Displaying items by tag: bull market

M&A activity in the energy sector continues at full speed. The latest deal involves ConocoPhillips buying Marathon Oil for $22.5 billion in an all-stock deal that is expected to close in the fourth quarter. Each Marathon shareholder will receive 0.255 shares of Conoco for every share of Marathon, equating to a 15% premium to its price prior to the deal’s announcement.

Last October, ExxonMobil and Chevron completed similar acquisitions of Occidental Petroleum and Diamondback Energy for $60 billion and $53 billion, respectively. The motive for these deals is identical, as the oil majors are looking to scoop up prime North American energy-rich territory. Further, energy companies have enjoyed years of robust cash flow during the post-pandemic period, which they’ve used to pay off debt, return cash to shareholders, and make acquisitions.

According to Conoco CEO Ryan Lance, the deal will strengthen the company’s portfolio of assets and increase its supply of ‘high-quality, low-cost inventory’. He has also said that consolidation is ‘the right thing to be doing for our industry’. Since the Exxon and Chevron deals, there have been rumors of a competitive bidding process between Devon Energy and Conoco for Marathon. Previously, Conoco had lost out to Diamondback Energy as both were vying for Endeavor Energy Resources, a private producer in the Permian Basin.

Finsum: The M&A spree in the energy sector continues with ConocoPhillips buying Marathon Oil for $22.5 billion. 

Value investing has underperformed over the last 15 years. Flows have followed this performance, with allocators favoring growth strategies. As a result, the number of practitioners of pure value investing has dwindled, especially in the US. Further, many are questioning, whether, it’s still a viable strategy.

There was some optimism that a period of higher interest rates and economic growth would revitalize value stocks especially following the speculative surge of many growth stocks in 2021. However, this turned out to be fleeting as the boom in artificial intelligence (AI) in 2023 sent many growth stocks to new, all-time highs, undoing value’s brief period of outperformance. 

However, the story is much different from an international perspective, where value stocks have been outperforming for a meaningful period. This lends credence to the argument that value’s underperformance is more about the US and technological disruptions than a change in how markets operate. Disruptive technologies like cloud computing and artificial intelligence have allowed a handful of companies in the US to grow to unprecedented scale, which has distorted the growth vs. value dynamic. 

History also shows that markets adapt to these technologies quite rapidly. Over time, margins and profits compress. The long-term benefits of the technology will be realized by the companies that are able to successfully implement the technology to operate more efficiently. 

Finsum: Value investing has underperformed by a significant degree over the past couple of decades. Yet, it’s a different story from an international perspective. 

The world is slowly transitioning to renewable energy. For institutional investors, this transition is likely to bring many investment opportunities. Of course, this will be a slow process that will take place over decades.  

The first step is the displacement of coal by natural gas, which is cleaner in terms of emissions and has already begun in many parts of the world, including the US. Another essential step is investing in various clean energy segments such as batteries, transmission and distribution, utilities, and renewable generation equipment. 

Many countries are recognizing energy security as a national security concern, which is also leading to supportive policies and capital flows. Countries are investing in electrification and local manufacturing in key areas like semiconductors, energy production, and storage. 

As the world moves toward net-zero emissions by 2050, companies in many parts of the economy will have to invest in decarbonization efforts. Morningstar sees opportunities for investors who understand the transition’s impact on the economy and various industries.

Capital expenditure for clean energy is expected to reach between $4 trillion and $5 trillion per year by the end of the decade. However, due to the transition taking place over a multi-decade period, investors should also have sufficient patience, anticipate volatility, and manage risk throughout the cycle. 

Finsum: We are in the early stages of a transition from fossil fuels to renewable energy. There will be plenty of opportunities for investors to earn healthy returns, given the size and scale of the trend.

Energy has been one of the best-performing sectors YTD with a 10% gain. Energy prices have moved higher due to increased geopolitical uncertainty and strong economic data. Looking ahead, LPL remains bullish on energy and recommends overweighting the sector.

It notes that valuations are quite attractive, especially with producers focusing on cash flow in recent years. In the post-pandemic period, free cash flow yields have averaged 8%, while this figure averaged 4% in the preceding decade. And producers have been using this cash to buy back shares, raise dividends, and pay off debt. 

From a technical perspective, LPL notes the relative strength as the sector has been making new, all-time highs for much of this year. Additionally, there has been strong breadth, indicating broad-based buying pressure. 

Another looming catalyst is that there has been some rotation out of the ‘Magnificent 7’ stocks into cheaper parts of the market, such as energy, financials, and small-caps. Growth stocks have led the market higher for most of the past year, but with valuations extended, there is an increased risk of a pullback or correction.

Finally, investing in energy provides some protection against inflation continuing to linger above the Fed’s desired level and rates remaining elevated as a consequence. Energy also tends to rally when long-term bonds weaken, providing a hedge for portfolios.

Finsum: Energy has outperformed to start the year. LPL remains bullish on the sector due to its attractive valuation, positive correlation with inflation, and relative strength.

2024 has continued 2023’s trend of growth outperforming value. YTD, the iShares S&P 500 Growth ETF (IVW) is up 15%, while the iShares S&P 500 Value ETF (IVE) is up only 6%. For many investors and portfolio managers, this presents an opportunity to increase exposure to high-quality, value stocks. 

NewEdge Wealth CIO Cameron Dawson sees risk with many growth stocks given ‘nosebleed valuations’. However, he believes that there are value stocks with strong balance sheets and cash flow that still have growth potential, specifically in semiconductor supply chain stocks, and older growth stocks that have now matured into value stocks like eBay or Broadcom.

Another approach is to look at ‘unloved sectors’. Examples include utilities, materials, financials, and energy. These have underperformed in the last couple of years amid an environment of higher rates and decelerating global growth. If financial and economic conditions start to improve, then these sectors could enjoy strong rallies. Housing is another interesting area for value investors, given strong fundamentals due to demographic-driven demand and limited supply in addition to attractive valuations. 

According to history, small-cap value stocks tend to outperform during this part of the market cycle. Eric Leve, the CIO of Bailard, sees the next group of AI winners emerging from this category with particular upside in software-as-a-service and cybersecurity stocks. 

Finsum: Value investing is certainly out of favor given the massive outperformance of growth over the last few years. Yet, many investors and portfolio managers see this as an opportunity to increase exposure and de-risk and diversify their portfolios.