Why Energy Stocks May Stage A Big Rebound

SHOSHANNA DELVENTHAL | December 13, 2018

Why Energy Stocks May Stage A Big Rebound
Energy stocks, now wallowing in a bear market as measured by the Vanguard Energy ETF (VDE), are poised for the biggest gains of any sector, according Bank of America’s latest “Relative Value Cheat Sheet.” “Energy jumped to #1 in our tactical sector framework for the first time since May 2018, boosted by strong earnings revisions and cheap valuations, while price momentum remained the weakest of all sectors,” Bank of America says. Meanwhile, tech stocks, which led for three straight months, fell to number six on weak price momentum, the lowest ranking sector since June 2016.Energy stocks look like a screaming buy, according to several metrics cited by the bank, including price to book. "Energy still trades at all-time lows and nearly 40% below average," says Bank of America, which estimates energy stocks now have 58% implied upside, more than financials, health care, materials and other sectors. This means now may the time to scoop up energy stocks. Bank of America says valuations are at attractive levels, even after accounting for elevated oil price volatility. The bank argues that these stocks are very cheap as measured by growth, free cash flow, and relative to bonds, though they might look expensive in terms of metrics such as trailing price to earnings. Higher oil price volatility typically translates into lower multiples for energy stocks. Average relative forward price-to-earnings in similar markets has historically been much higher, 0.89 compared to only 0.84 today, according to the report.In the long term however, Bank of America is market-weight the energy sector, which is the firm’s lowest ranked quality sector in the S&P and “is exposed to secular supply increases (US production) and demand disruption (solar/wind, electric vehicles, efficiency enhancements, etc.)”

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