By Philip van Doorn
This has been a painful year for stock market investors, as nothing seems to be working.
There is an exception: Energy. It’s the best-performing sector and might still be a bargain for those who can be patient.
A snapshot of the 11 sectors of the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.80% underlines what a bargain the energy sector is for long-term investors:
| Sector | Forward P/E | Forward FCF Yield | Dividend yield | Estimated headroom | Total return – 2022 |
| Energy | 8.5 | 11.94% | 3.77% | 8.17% | 46% |
| Financials | 11.5 | 8.59% | 2.18% | 6.42% | -14% |
| Materials | 13.0 | 6.39% | 2.26% | 4.13% | -17% |
| Communication Services | 14.9 | 6.52% | 1.02% | 5.49% | -33% |
| Health Care | 15.9 | 6.35% | 1.71% | 4.64% | -9% |
| Industrials | 16.3 | 5.57% | 1.82% | 3.75% | -14% |
| Real Estate | 17.4 | 4.72% | 0.00% | 4.72% | -21% |
| Consumer Staples | 19.9 | 4.59% | 2.70% | 1.89% | -6% |
| Information Technology | 19.9 | 4.93% | 1.08% | 3.85% | -25% |
| Utilities | 20.2 | -2.07% | 2.84% | -4.92% | 7% |
| Consumer Discretionary | 26.6 | 3.51% | 0.87% | 2.64% | -22% |
| S&P 500 | 16.5 | 5.22% | 1.70% | 3.52% | -17% |
| Source: FactSet | |||||
The energy sector shines no matter which column is used to sort the table. Here it is sorted by forward price-to-earnings ratio, based on weighted aggregate earnings estimates among analysts polled by FactSet.
The second column shows estimated free cash flow yields, based on current share prices and free cash flow estimates for the next 12 months.
The energy sector has the highest dividend yield of any S&P 500 /zigman2/quotes/210599714/realtime SPX +0.80% sector. It also has the highest estimated FCF yield and the most expected FCF “headroom” — an indicator that there will continue to be plenty of free cash that can be used to raise dividends or buy back shares.
So there are the “four reasons” in the headline of this article: lowest forward P/E, highest expected FCF yield, highest dividend yield and most expected FCF headroom.
More about energy: There’s only one ‘perfect asset’ to fight all the bad news that could be coming, says this strategist
“Based on the next several years of free cash flow generation, with the cash plowed into repurchases, 20% of the market cap can be repurchased on average over the next two to three years” by integrated U.S. oil companies, according to Ben Cook of Hennessy Funds.
Among the integrated oil companies in the S&P 500 are Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM -0.70% and Chevron Corp. /zigman2/quotes/205871374/composite CVX -0.08% .
Share buybacks at those levels mean drastic reductions in share counts, which can raise earnings per share significantly and add support for higher stock prices over time.
LNG has untapped potential
During an interview, Cook, who co-manages the Hennessy Energy Transition Fund /zigman2/quotes/207530769/realtime HNRIX -0.60% and the Hennessy Midstream Fund /zigman2/quotes/200664705/realtime HMSIX -0.95% , pointed to the potential for continuing increases in U.S. exports of liquid natural gas (LNG). Europe is now competing with Asia for U.S. natural gas as the supply from Russia has been disrupted.
Cook said that based on projects under development and estimates by the Energy Information Administration, U.S. daily LNG export capacity might increase to 20 billon cubic feet (Bcf) from the current 12 to 13 Bcf by the end of 2025 or in 2026.
But he added that the current projects “are underwritten based on contracts to sell to consumers in China, Korea and Japan.”
“Even with new capacity coming online, it is not as if those units haven’t been spoken for,” he said.
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