By Michael Brush
Like World Wide Wrestling champ Randy Orton, energy stocks came from “outta nowhere” this month to beat the heck out of the rest of the market.
From the day before Pfizer /zigman2/quotes/202877789/composite PFE -2.37% first gave optimism a booster shot with great vaccine news (on Nov. 9) through the close on Wednesday, the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund /zigman2/quotes/203527521/composite XOP +1.80% shot up 29.6%. The S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.28% only advanced 2%, and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.29% rose 4%.
But this move is just getting started. Energy stocks are still a strong buy. This group could be up 60% in a year vs. much more modest gains gain for the indexes above and the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.63% .
Sure, after this kind of “outta nowhere” move, energy stocks could sell off near term –- primarily because COVID-19 lockdowns may threaten growth and kill off bullish investor sentiment. But in that scenario, just buy more.
Here are seven reasons why — and 17 of the best stocks and ETFs to consider.
1. Energy names are a cyclical play. Since the March lows, I have been emphasizing cyclical companies in my stock letter. For much of this time I liked them in part because they were hated (a great contrarian play). Other investors like them now, but that’s OK with me.
Cyclical stocks outperform as we move from recession to growth and to more growth. I predict the economy will be phenomenally strong by next summer because of fiscal stimulus as well as progress on the virus.
2. Energy stocks still have big room to move. If oil prices get back to pre-COVID-19 levels along with the economy, energy stocks could move up 60% from here, says Jonathan Waghorn, who manages the Guinness Atkinson Global Energy Fund /zigman2/quotes/208666626/realtime GAGEX -1.03% from London. That’s the gain that would take them back to pre-COVID-19 levels – along with oil prices and the economy.
“This rebound is nothing compared to what we lost this year,” says Waghorn.
3. Flights will resume. The COVID-19 recession has been a transportation recession. As vaccines and herd immunity ease worries about the virus, people will fly (and drive) again, bringing back demand for fuel oil, notes Waghorn. That’ll boost energy prices.
U.S. gasoline consumption is at 90% of normal, and jet fuel is at 40%, writes Morgan Stanley energy analyst Benny Wong.
Other key sources of demand like heavy transport and petrochemical production are tightly linked to GDP growth.
4. Energy stocks look cheap. The sector trades at a price-to-book ratio below one, and it has one of the lowest relative valuations to the S&P 500 in the last 70 years, says Waghorn. “We continue to see fairly attractive valuations across the group,” says Morgan Stanley energy analyst Devin McDermott.
5. The crowd has yet to rush in. “Generalists do not yet appear to be coming back to the group even as oil demand and prices are very levered to successful vaccine implementation,” says Goldman Sachs energy analyst Brian Singer.
Lots of people are left to push your stocks higher, if you buy now.
6. Supply won’t necessarily come rushing back. OPEC plus Russia have been well-disciplined about controlling supply to support prices. Waghorn thinks this will continue. These countries will allow prices to rise enough to reap some gains – but not enough to incentivize U.S. frackers to come back online.