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5 Energy Stocks That Escaped the Sector Shortfall in 2017

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U.S. stock markets are now hitting all-time highs on a daily basis. Stocks have mostly rallied since last year’s election, with a booming U.S. economy, supportive monetary policy and robust corporate earnings being the key triggers. Expectations that the Trump administration’s proposed tax and regulatory reforms will help companies’ and consumers, have given investors further reasons to put their money in stocks.

As a matter of fact, the S&P 500 crept further into record territory Tuesday. The index eked out a gain of 0.2%, to an all-time closing high of 2,664.11.

What’s Driving the S&P 500 Higher?

What's Sending the Index to a String of Records?

It’s fairly simple: investors have driven up equities on evidence of economic growth.

As per the Commerce Department’s second estimate, the U.S. economy expanded at a 3.3% pace in the third quarter. This represents an improvement from the annualized growth rate of 3.1% in the April to June period and the strongest performance since the third quarter of 2014. Moreover, the latest figure represents the best back-to-back quarters of at least 3% growth since 2014.

Further, the November payroll report showed that the domestic labor market continued its recovery from the effects of hurricanes, while jobless rate ticked stayed at a 17-year low of 4.1%.

The central bank’s lifting of short-term interest rates by a quarter of a percentage point can also be interpreted as a by-product of rising economic growth and optimism. The expected 'policy normalization' simply indicates that the economy is ready for the ‘quantitative easing’ tap to be turned off. Though higher interest rates raise the cost of debt capital, an expanding economy supersedes low-borrowing costs in the grand scheme of things.

Meanwhile, President Trump’s proposals to overhaul the tax law and make it business friendly, added to the positive sentiment and powered stocks higher.

Finally, strong earnings reports from corporate biggies, which has helped support high valuations, boosted sentiments. Following two successful quarters of earnings numbers, U.S. companies posted all-time record earnings in the third quarter. Total earnings for S&P 500 companies were up 6.9% from the same period last year on 6% higher revenues.

Energy: The Only S&P 500 Laggard

While the S&P 500 equity index has been on a tear, it has been a wild ride for the energy market in 2017, setting pulses racing of even the steadiest investors. In fact, energy is the only sector to give negative returns to investors this year.

A strong third quarter notwithstanding, energy – which was the best S&P sector performer in 2016, with a market-thumping 24% return – has not exactly had a great year. The Zacks Oil-Energy sector is down more than 1% year-to-date versus 21.9% growth for the broader S&P 500.


With U.S. drillers ramping up their output quickly in response to the extension of OPEC-led supply cuts until the end of 2018 and rising rig count pointing to further jump in American production, the tightening of global oil market is getting undermined and prices are under constant pressure.

The steady trend of rising domestic oil production continues to be the biggest headwind for the market. As per the U.S. Energy Department's latest inventory release, U.S. output rose by 73,000 barrels per day (for the week ending Dec 8) to 9.8 million barrels per day – the most since the EIA started maintaining weekly data in 1983.

Market participants argue that fundamentals point to a looming oil supply growth despite WTI crude currently staying above the $55 per barrel mark.

A Handful of Companies Defied the Downturn

Even amid the volatile, declining market, some companies have stood firm, indicating investors’ confidence in them. If bought now, these stocks are likely to outperform others and create long-term wealth. However, selecting stocks to buy could be a tricky proposition, especially with oil prices moving like a roller-coaster. One should focus on picking up stocks that have a sound business, good management and is not pricey.

Amid the uncertainty, it is necessary that investors adopt a cautious approach. It is prudent to opt for large cap stocks. These have a market capitalization of over $5 billion, and also have further room for upside. These companies enjoy leading market positions, have a global footprint, strong cash positions and are large enough to stay strong even in the face of unfavorable events.

While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy. In particular, we have shortlisted 5 companies that have outperformed oil prices over the year, and have a Zacks Rank of #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our Choices

BP plc (BP - Free Report) , a #1 Ranked stock, is our first pick. London-based BP is one of the largest publicly traded oil and gas companies in the world. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses. BP, with a market cap of $130.9 billion, boasts of +14.4% year-to-date price change. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

Our second choice is HollyFrontier Corporation (HFC - Free Report) – one of the largest independent refiners and marketers of petroleum products in the U.S. This Dallas, TX-based Zacks Rank #1 stock, has a current market cap of $8.1 billion. Also, shares of the company have gained 53.2% since the start of the year.

Then we have ConocoPhillips (COP - Free Report) . Headquartered in Houston, TX, ConocoPhillips is a leading global energy exploration and production company with operations and activities in 21 countries. This Zacks Rank #2 stock, with a current market cap of roughly $61.7 billion, is up 5.4% year to date.

Statoil ASA is another company we recommend. Headquartered in Stavanger, Norway, Statoil is a major international integrated oil and gas company. The company carries a Zacks Rank of 2 and has a current market cap of roughly $65.3 billion. Also, shares of the company have gained 16.1% since the start of the year.

Finally, there is CNOOC Ltd. (CEO - Free Report) . It is one of the three oil companies in China and one of the largest independent oil and gas exploration and production companies of the world. The Zacks #2 Ranked stock, with a market cap of $60.5 billion, has gained 19% so far in 2017.

Zacks Editor-in-Chief Goes "All In" on This Stock

Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.

Download it free >>

In-Depth Zacks Research for the Tickers Above

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CNOOC Limited (CEO) - free report >>

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BP p.l.c. (BP) - free report >>

ConocoPhillips (COP) - free report >>

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