Time To Overweight Energy: The Best Value And Growth Sector In The S&P500

Includes: IYE, VDE, XLE
by: Glyndon Park


Energy Sector was among the worst performing earnings sectors.

Projected double digit 1 and 5 year earnings growth rates trading at discount to market multiple.

Three Energy Sector ETFs to capture the valuation and growth upside.

In an expensive market investors should look for the best combination of value and growth in making sector allocations.

The Energy sector was among the worst performing sectors within the S&P500 with earnings declining by 4.4% year on year. The sector was lead lower with earnings declines at the majors Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). The refiners were a relative bright spots with Valero (NYSE:VLO) and Phillips (NYSE:PSX).

According to S&P Energy sector earnings in the S&P500 are projected to grow by 14.0% in 2014 and by 12.44% over the five years. At the same time Energy trades at forward price to earnings multiple of 13.52 - a 13% discount to the market multiple of 15.6

Measured by the popular PEG ratio the energy sector is at 1.09, the lowest multiple among S&P500 sectors except consumer discretionary at 1.06.

Based on the above energy sector offers the best value in the S&P500 trading at a market multiple discount and expected growth rate.

We recommend 3 Energy ETFs to capture the upside from the Energy valuation and earnings growth story.

  • Energy Select SPDR (NYSEARCA:XLE) is the largest energy sector ETF and has an attractive 0.18% fee and a 1.43% dividend yield.
  • Vanguard Energy Index Fund (NYSEARCA:VDE) offers the lowest management fee of the three at 0.14% with a slightly higher dividend yield of 1.69%
  • Dow Jones Energy Index (NYSEARCA:IYE) has a relatively high fee at 0.48% with a dividend yield of 1.51%

All three funds have significant overlap in their top holdings and would not expect one meaningfully out or underperform the other. VDE is likely the top pick with lower fees and largest number of holdings.

-Always stat Rational and Exuberant @Glyndonpark

INDEX NAME   2013 Earnings Growth 2014 Growth
Operating Earnings Per Share by Economic Sector      
S&P 500   10.83% 11.86%
S&P 500 Consumer Discretionary   12.80% 14.57%
S&P 500 Consumer Staples   6.02% 6.05%
S&P 500 Energy   -4.40% 14.00%
S&P 500 Financials   28.16% 2.61%
S&P 500 Health Care   2.85% 19.70%
S&P 500 Industrials   11.67% 11.33%
S&P 500 Information Technology   2.72% 17.60%
S&P 500 Materials   -4.29% 29.06%
S&P 500 Telecommunication Services   264.20% -6.34%
S&P 500 Utilities   1.50% 11.36%
Click to enlarge

    S&P 500 S&P 500 5YR S&P 500
Index   15.60 11.94 1.31
Consumer Discretionary 17.84 16.78 1.06
Consumer Staples   17.40 9.35 1.86
Energy   13.52 12.44 1.09
Financials   13.93 10.36 1.34
Health Care   17.44 11.84 1.47
Industrials   16.27 11.26 1.44
Information Technology 15.10 13.78 1.10
Materials   16.46 11.19 1.47
Telecommunication Services 13.39 6.91 1.94
Utilities   15.57 4.28 3.64
Click to enlarge
Source: S&P

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.