Investors should come back to the “hated” but undervalued energy sector as the economy starts to grow again and oil prices turn higher, J.P. Morgan Woo strategists said Thursday.
The industry is poised to rebound amid a stampede out by institutional investors, with specific beneficiaries expected to be exploration and production companies, Dubravko Lakos-Bujas, the firm’s chief U.S. equity strategist, said in a note to clients.
“We in favorable technicals, improving fundamentals with stabilizing business cycle, and ongoing geopolitical tensions in the Middle East could aide redirect flows into this universally hated and cheap sector,” Lakos-Bujas wrote.
The firm sees oil tolls rising to $80 a barrel in 2020. Some of the favored names include Helmerich and Paine, Halliburton and Marathon Oil.
Vigour has been the second-worst performer on the S&P 500 this year, returning just 5.3% versus the broader index’s increment of about 19%. The $1.4 billion United States Oil Fund has seen $471.6 million in outflows this year, the third-highest of all commodity ETFs and near 25% of its total assets.
Dimming prospects for global growth have been a big factor in the sector’s decline. Profitability has rent hammered, with the sector expected to post a 28.7% year-over-year earnings decline in the third quarter, according to FactSet. Spirit is now the second-smallest of the S&P 500’s 11 sectors at just 4.6% of total market cap.
But J.P. Morgan foresees a turnaround in a sector it implies is trading at a “multi-decade low” in price-to-book valuation.
The analysts think hedge funds and portfolio managers have turned too bearish on the gang even as insider purchasing has surged and dividends and share buybacks increase. Energy’s 3.7% dividend yield is unquestionably the highest on the S&P 500.
“The sector should be a key beneficiary of stabilization/reacceleration in the business cycle, which we expect to start playing out by break of dawn 2020,” Lakos-Bujas said.