Energy stocks look “downright cheap” right now, especially given the broader equity market is holding around record highs, according to an influential economist.
“In a world where everything looks so expensive, energy stocks look downright cheap,” Bloomberg quoted David Rosenberg, the chief economist & strategist of Rosenberg Research and Associates, as telling clients in a note.
As equity markets are holding around all-time highs, and the price of crude oil has risen almost continually for six months, energy stocks have not proven quite so popular among investors.
Last week, the oil price spiked briefly to its highest in four months, above $65 a barrel, when tensions between the United States and Iran ramped up following the assassination of a prominent Iranian general.
But in terms of price performance, energy stocks have lagged, relative both to the crude price and to the broader equity market and now may prove to be a good point at which to get involved.
Rosenberg, a long-time markets bear, was quoted as saying that at a minimum, the sector is “priced for a much weaker oil environment than what we have on our hands.”
With a likely surplus of oil looming this year, few analysts are expecting a run-away rally in the price of crude. A recent Reuters poll showed most expect the price to average around $63 a barrel this year.
Coordinated production cuts by some of the world’s largest crude exporters, led by Saudi Arabia, as well as the US and China attempting to resolve their near-two year old trade dispute, should help cushion the oil market.
Over the last six months, the S&P energy sector has fallen by about 2 per cent, compared with a 0.6-per cent gain in the US crude price and with a 10 per cent gain in the S&P 500 index itself.
The sector staged a sustained rally over the final few weeks of 2019, in line with the rest of the market. But, looking at the last three months, the energy index still only gained 6.5 per cent, compared with an 8 per cent gain in the crude price and a similar gain in the S&P.
“There are few sectors in the equity market that have this characteristic of having bad news priced in at this moment,” Rosenberg wrote. “But in the energy space, perhaps in the overall materials sector as well, all that has to happen is for something bad not to happen and there will be a positive rerating as the end-result.”
In terms of valuations, the energy sector looks relatively cheap. With a forward price-to-earnings ratio of 17.1 - as calculated by analysts Yardeni Research - the energy sector is one of the cheapest on Wall Street.
The S&P 500 has a forward P/E ratio of 18.3, compared with the consumer discretionary sector - which includes the likes of Amazon, eBay, General Motors or McDonald’s, with a ratio of 22.1.