Energy

Oil & Gas Equipment & Services was purchased for the Select Industries portfolio last month, re-establishing exposure to what was our largest overweight entering 2023. The sector leapt from #11 to #4 in the ranks on the back of improved sentiment and macro readings. 

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In the last twelve months, spending on energy goods and services as a share of total consumer outlays dropped by 1.1%—that amounts to about $200 billion in savings (annualized).

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While the valuation gap between Growth and Value sectors was compelling just a couple of years ago, it has closed drastically the last twelve months. Our analysis shows that Value sectors (Energy, Industrials) are still more favorable than Growth sectors (IT, Health Care).

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Energy remains the top-rated sector, but Information Technology, Communication Services, and Financials follow closely behind. These offer a diverse mix of commodity, growth, and cyclical options.

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Energy has solidified its spot atop the GS Scores; it’s by far the highest-rated sector and counts three underlying groups among the top-ten industries out of all the sectors. Valuations have only improved amid steady outperformance, and renewed capital discipline looks to remain for the foreseeable future.

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The Energy sector has improved across a variety of factor subsets, with particularly large jumps in growth and macro/economic categories. For investors weighing investment ideas in the Energy space, we highlight the three Attractive groups for consideration.

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After years of languishing in the rock bottom of Group Selection Scores and sector rankings, Energy exploded higher this month, jumping from 10th lowest (out of eleven broad sectors) to 3rd highest in our composite rankings.

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March 23rd marked the one-year anniversary of the COVID-19 bear-market bottom. We are all eager to turn the page on the pandemic ordeal and move forward to brighter days ahead. Looks like some big help is coming our way.

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The Energy sector emerged as the top performer for January, a nice respite after a terrible 2020—but not exactly a good omen. Unlike in horse racing—where the concept of “early speed” has significant predictive power—the early leader in the sector-performance sweepstakes hasn’t reliably followed through in the last 30 years.

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Fundamentally, we don’t have much new to say on the disaster that Energy-sector equities have become. Mostly, we want to illustrate the danger of assuming that the stocks of commodity producers will necessarily follow the path of their underlying commodities.

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With crude trading at only about half the level seen in the first few years of this expansion, there might be a tendency to view its current price as depressed. But from an inflation-adjusted perspective, today’s price sits right on top of its modern-era (post-embargo) median.

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The “robustness” of the “Cheapest Sector Strategy” concept is illustrated by strong results across all rebalancing frequencies.

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Someone forgot to tell commodity trades this is an era of diversity of inclusivity: This year’s leap in the S&P/Goldman Sachs Commodity Index has been entirely the result of its heavily-weighted energy inputs.

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Crude oil and the U.S. Dollar Index accomplished a relatively rare feat by moving to simultaneous six-month highs earlier this week (Chart 1).

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While watching a forecast go awry is painful, there’s an alternative that we consider to be even worse: the failure to be paid on an accurate forecast. The resulting feeling of helplessness must be similar to that of a corporate director who manages to lose money on inside information.

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Anticipating prolonged weakness of energy prices, we advise avoiding two segments within the Energy sector: companies with high balance-sheet risk, and special Energy investment vehicles called Energy Royalty Trusts.

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We revisit commentary we published in 2015 regarding the late-2014 oil price crash and review why, at that time, we believed oil prices could stay at depressed levels for a longer period than most expected. Additionally, we advise avoiding two Energy sector segments: companies with high balance-sheet risk, and Energy Royalty Trusts.

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We wrote a year ago that the Energy sector’s 2014-2016 decline of 47.3% was the worst-ever sector decline occurring outside of a cyclical bear market.

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The gap between crude oil prices and Energy sector RS is now much wider than seen even at that historic 2014 juncture. The “divergent” weakness in Energy stocks suggests that crude will likely trade lower.

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Remember the special amplifiers used by the fictional rock group Spinal Tap that could be dialed up to eleven? S&P’s decision last year to designate Real Estate as a full-fledged sector means that our GS rankings can now be dialed down to eleven, and unfortunately the Energy sector has been a frequent occupant of that undesirable spot.

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