You can’t keep the energy sector down.
That’s the message from strategists at Evercore, who upgraded those stocks to overweight from neutral and cited several tailwinds for that newfound confidence, in a note to clients on Sunday.
“Energy is bolstered by a U.S. economy still expected to grow, European conflict, a newly weakening U.S. dollar and a China expected to end ‘Zero COVID’ in early 2023,” said a team of strategists led by Julian Emanuel, Evercore ISI’s chief equity and quantitative strategist.
Note, their call came amid tumbling oil prices to start the week, with both U.S.
and benchmark international Brent prices
dropping 4% after disappointing economic data from China. The central bank of the world’s number-two economy cut its key rate on Monday, as the economy struggles to recover from pandemic lockdowns.
Oil prices have managed to gain 23% so far this year, though the commodity has been under pressure as the third quarter kicked off.
The energy sector represents 4.2% of the S&P 500
and based on aggregated net income is a 10.6% chunk. Earnings are expected to contract 16% in 2023, with a forward valuation of 8.5 times versus 18.1 times for the S&P 500, according to Evercore analysis.
“The ‘bar’ for energy is set low. Very low,” said Emanuel and the team.
Consisting of 21 companies, the S&P 500 energy sector is tracked by the Energy Select Sector SPDR Fund
up 41% so far this year, and 12% in the latest quarter. The S&P, meanwhile, is down 10%, but up more than 12% in the latest quarter.
Evercore has screened for what they call “energized energy” stocks — names from the Russell 3000 index
with high short interest that are down more than that index from the highs, with positive 2023 earnings per share revisions since the end of the second quarter.
Evercore also recommends going long the SPDR S&P Oil & Gas Exploration & Production