Plenty more upside ahead for energy stocks, LPL Financial strategist says

Data analyzing in commodities energy market: the charts and quotes on display. US WTI crude oil price analysis. Stunning price drop for the last 20 years.

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Energy (NYSEARCA:XLE) is the runaway winner in the S&P 500 sector standings with a nearly 50% YTD increase, and it was the only group to finish the week with a gain, +4.2%, but LPL Financial chief equity strategist Jeff Buchbinder sees five reasons for oil and gas stocks to continue their run higher.

Strong fundamentals: China has been reopening from COVID-19 lockdowns, and a potential deal allowing Iranian crude to flow freely again could be offset by production cuts from Saudi Arabia.

Technical factors: Among several that could bode well for energy stocks, breadth has been strong, with 90% of stocks in the S&P 500 energy sector trading at 20-day highs.

Earnings momentum: Energy was the clear winner of the Q2 earnings season, and has increasingly supported dividend hikes and share buybacks.

Valuations are too pessimistic: The sector has been trading at a P-E ratio below 9 based on 12-month forward earnings vs. 17.5 for the broader S&P 500 - Buchbinder says this makes no sense, given sector cash flow yields that are topping 10%, more than double the level for the S&P 500.

Warren Buffett: "We're not saying buy OXY, but rather that if Mr. Buffett likes the energy sector that much, we should pay attention," Buchbinder says.

WTI crude oil futures (CL1:COM) finished +2.9% for the week at $93.06/bbl, supported by Saudi Arabia's comments this week that OPEC+ may cut production to tame market volatility, which UBS analysts say shows a desire among major producers to keep oil prices above $90/bbl.

Top 10 gainers in energy and natural resources during the past 5 days: (NYSE:INDO) +32%, (IPI) +29.4%, (HUSA) +27.4%, (HPK) +24.5%, (AREC) +23.8%, (SGML) +22.7%, (MTR) +22.1%, (TUSK) +19.6%, (UUUU) +19.1%, (UAN) +19.1%.


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