Is It A Good Time to Invest in Energy Stocks?
Energy stocks have been some of the weakest performers of the U.S. stock market over the past five years. It’s easy to understand why these stocks have done so poorly in recent history, given significant volatility in the underlying oil market. Following a precipitous drop in the price of oil, which reached a bottom at below $30 per barrel of crude oil in early 2016, oil has recovered to a recent price well above $60 per barrel. The past five years have been an unpleasant rollercoaster ride for those with exposure to energy stocks.
While the oil market has returned to more normal price levels, the performance of energy stocks has continued to lag. Over the same time horizon, the S&P 500 energy sector has only gained 16%. Because the profits of energy companies are levered to the price of oil, if anything a rise in oil prices would usually suggest an even greater reaction from the price of energy equities. Why the disconnect? It appears that there remains considerable pessimism from the financial markets that the recent gains in oil prices are unsustainable. The market may be a bit too pessimistic with its current judgment.
We view the current environment as an attractive time to invest in the energy sector of the U.S. stock market. Energy stocks have lagged the broader U.S. stock market for several years now, with some of the worst underperformance of any sector in the S&P 500 Index. On relative value basis, the sector looks inexpensive.
With the current stock market bull run eclipsing its ten-year anniversary in March, we have had a great run in the stock market. Since 2009, most stocks and sectors have appreciated tremendously. So as we evaluate the investment landscape today, we see fewer bargains out there. But that’s ok—the U.S. and global economy remain solidly in growth mode and it still makes sense to own broad exposure to the U.S. stock market. That said, we are vigilant in seeking opportunities to invest where values are cheaper—“buying low” when others are “buying high” on other parts of the market. It is for this reason that we have added a tactical position to U.S. energy companies.
We will continue to monitor the underlying oil market and its impact on the U.S. energy sector. While it is impossible to say what will happen in the short term, we believe that an investment today in U.S. energy companies is a prudent long-term decision.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
 “Energy Stocks Can Soar if Price of Oil Just Holds Its Ground, Analysts Say.” Barron’s. April 5, 2019. Online. https://www.barrons.com/articles/energy-stocks-can-soar-if-price-of-oil-doesnt-fall-51554486837Next Blog Article: Diversification in Finance: Why It’s Not Always the Answer
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