Just how out of favor are energy stocks at the moment? Consider this nugget from David Rosenberg, founder and president at Rosenberg Research: relative to the S&P 500
which trades at 18 times earnings, energy stocks trade at an eight-point discount, a differential only seen 5% of the time.
Of course, there’s a reason energy stocks are unloved. Climate-focused investors are shunning them, as they try to get the world to move away from fossil fuels. The sector is so starved of money that oil and gas capacity utilization is running at 98%; about 20 points above that of the broader industrial sector, according to Federal Reserve data. “The world needs oil, full stop. And yet, thanks to regulatory constraints and years of institutional investors backing away, the capital starvation has led to a rapid depletion of new oil supplies — even fracking production has levelled off,” says Rosenberg, a former Merrill Lynch strategist. He says the supply backdrop relative to demand could hardly be more bullish. He also notes that energy stocks have hung in better than the underlying commodity. The Energy Select Sector SPDR ETF
is down 9% from its November highs, while crude is down 40% from its March peak and natural gas is off 71% from its August highs. “Attractive multiples and very supportive business fundamentals are providing a strong antidote to what is happening in the commodity markets,” he says. Besides the energy ETF, Rosenberg also recommended that investors look at debt, particularly from natural-gas producers. “Don’t let a weather-induced drop in the commodity price this year deflect attention away from what’s really important, which is the deep discount the entire capital structure of the sector trades at benchmarked against the earnings and balance sheet fundamentals,” he says.