Even as stocks were suffering from trade-related tensions last week, one key sector was steadily notching up gains. While all other key sector SPDRs of the S&P 500 incurred losses over the last five trading days, the Energy Select Sector SPDR (XLE) gained 2.6% over the same period. Analysts feel that this long-neglected sector is poised for a rebound on the back of earnings growth and impressive valuations.
Other sector experts feel that the sector is entering a period of restraint, one which is traditionally beneficial for stock performance. Fresh geopolitical risks have also surfaced recently and are likely to support oil prices in the near term. Taking all these factors into account, this is an excellent time to invest in select oil value plays.
“Restraint” Phase Best for Sector Performance
Analysts at The Goldman Sachs Group, Inc. GS think the oil sector is in the process of exiting a contraction phase which began during the commodity slump of 2014. Soon oil companies will enter a period characterized by restraint. At this point, worries surrounding the effect of electric cars and fears about oil demand plateauing will lead to a more conservative approach from oil companies as a whole.
In such a phase, the focus shifts to curtailing investments and erecting stiff barriers to entry. The investment bank feels that it is during periods of restraint that oil companies exhibit their best performances. According to Goldman, the legend that a period of rising oil prices leads to better performance from the sector is wholly unfounded. Instead, such a phase is characterized by rising costs and inefficiencies which weigh on margins.
Earnings, Valuations Boost Prospects
Meanwhile, analysts at Credit Suisse Group AG CS think that the attractiveness of energy stocks has increased due to robust earnings growth and attractive valuations. According to researchers at the firm, strong fundamentals and soft stock prices have raised the attractiveness of sector valuations.
Further, the sector has exhibited strong earnings performances since the middle of 2016. Surging oil prices and a strong global economy are primarily responsible for earnings growth of this degree. Yet, prices largely lag earnings growth.
Also, for the first quarter, energy sector earnings are expected to be up +60.8% from the same period last year on +15.7% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from +15.8% to +14.4%. (Read: Handicapping the Q1 Earnings Season)
Fresh Geopolitical Risks Emerge
Oil prices hovered around the $70 per barrel mark on Tuesday, supported by simmering tensions in the Middle East. On Sunday, Saudi forces shot down ballistic missiles launched by Iran-backed Houthi militants. Some of these missiles had been aimed at the Saudi capital city of Riyadh.
Meanwhile, the United States has indicated on several occasions that it may withdraw from its nuclear pact with Iran. In such an event, the United States is likely to impose fresh sanctions on Iran which will impede oil exports. Trump’s decision to name John Bolton, a hawkish figure, as his new national security adviser has heightened such concerns.
Oil stocks held their ground last week even as other sectors crumbled in the face of trade war-related tensions. Exceptional earnings growth and impressive valuations have also raised the attractiveness of the sector. Meanwhile, analysts at Goldman think that the sector is entering a phase of restraint, characterized by strong performance.
Adding select value stocks from the sector to your portfolios looks like a good option at this time. Our selection is also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value-investing space.
Bonanza Creek Energy, Inc. BCEI is engaged in the acquisition, exploration and development of onshore oil and natural gas properties in the United States.
Big 5 Sporting Goods holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of B. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.35 lower than the industry average of 16.84.
Mammoth Energy Services, Inc. is an integrated oilfield service company.
Mammoth Energy Services holds a Zacks Rank #1 and has a Value Style Score of B. The stock has a P/E (F1) of 7.58x compared to the industry average of 17.46.
CNOOC Limited CEO is a company that engages primarily in the exploration, development and production of crude oil and natural gas offshore China.
CNOOC has a Value Style Score of B. The stock has a P/E (F1) of 8.66x, lower than the industry average of 10.62. The stock has a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Oasis Midstream Partners LP OMP is a master limited partnership company. It owns, develops, operates and acquires a diversified portfolio of midstream assets primarily in North America.
Oasis Midstream holds a Zacks Rank #2 (Buy) has a Value Style Score of A. The stock has a P/E (F1) of 8.80x, lower than the industry average of 12.99. It has a PEG ratio of 0.80, lower than the industry average of 1.78.
GeoPark Limited GPRK is an explorer, operator and consolidator of oil and gas.
GeoPark holds a Zacks Rank #2 and has a Value Style Score of B. The stock has a P/E (F1) of 9.98x, lower than the industry average of 16.84.
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