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%.