Is It Too Late For Energy Stocks?
2022.06.09 13:45
It Is Not Too Late To Buy Energy Stocks
If you are wondering about oil prices, the energy market, and whether it’s too late to buy energy stocks we’re here to tell you no. Absolutely not.
There are too many fundamentally bullish factors at play that we see energy stocks leading the market for the next few quarters. To put it simply, high oil prices are here to stay.
The combination of trillions in stimulus on a dollar-based commodity, tightening global capacity, and rising demand have us in the most bullish oil market we can remember.
The recent opening of China following their second round of COVID lockdowns is only going to exacerbate the problem and the problem has WTI on track to set a new all-time high fairly soon and that means profits for Energy Stocks.
When it comes to the energy stocks, it’s going to be all in the earnings, the revisions to the earnings outlook, windfall profits, and the fact that WTI is tickling the recent highs.
We don’t see any reason for WTI to correct even with a broader economic recession because demand for labor is still so high. Some companies are pulling back on hiring plans, sure, but Challenger, Gray & Christmas show this will be a record year for hiring intent, if not actual jobs.
But, back to energy, low valuation, wicked high profits, share buybacks, dividends, and balance sheet improvement are going to drive this market higher.
Energy Stocks Are Cheap, And High-Yielding
Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), the top two holdings in the Energy Select Sector SPDR® Fund (NYSE:XLE) and nearly 43% of the holdings, are trading at an average of 10.5X their earnings and yielding an average of 3.275% with both paying more than 3%.
This valuation is compounded by revenue and earnings that are at the highest levels in over a decade and are expected to continue growing on a YOY basis at least. Turning to the consensus earnings estimate for the Energy Sector, the sector is expected to grow earnings by more than 200% in the 2nd quarter and there is ample risk of an upside surprise.
Not only did the sector produce 245% growth in Q1, but it beat the consensus by 2300 basis points and oil prices are still rising.
Farther out, there are some clouds on the horizon in the form of next year’s earnings growth, but take that with a grain of salt. Energy sector earnings are, right now, expected to decline by about 10% in 2023, but this is against a better than 110% increase this year.
The takeaway, however, is that the full-year 2022 and full-year 2023 outlook for earnings haven’t seen nearly the amount of upward revision as Q1 and Q2 which leads us to believe both estimates are going to track higher over the next two to three quarters.
The Analysts Are Upgrading Energy Stocks
The analysts are still rating Exxon and Chevron as a Hold and Weak Buy, but the price target revisions and upgrades have been rolling in. In regards to the sector, the Energy Sector is the most upgraded sector by far with 12 companies in the top 20 Marketbeat.com Most Upgraded Stocks.
And Exxon and Chevron are in the group and moving higher along with it.
Turning to the chart of the XLE Energy Sector ETF, this chart is moving higher and showing no signs of slowing down.
The monthly action is the most telling with MACD setting an Extreme Peak that is convergent with a new high. In this scenario, we might see a pullback in the price action on a weekly or daily basis but it won’t last long and a move to new all-time highs is highly probable.
XLE Chart
