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Hated Energy Stocks May Be About To Rebound

Tsvetana Paraskova

Despite the fact that oil prices have recovered from the 2016 lows they hit in the worst downturn in a generation, energy stocks have seen little reprieve over the past two years.  

Investors have been shunning the energy sector amid heightened volatility in oil and gas prices, sudden price slumps, and concerns about future oil demand.

So cruel has been the investor snub that the energy sector has become one of the most hated industries to invest in.

At the same time, however, a growing number of analysts say that oil and gas stocks have been seriously undervalued, and the selloffs in the past few years may have been overdone.

The cheap energy stocks right now could be a buying opportunity, especially in light of predictions that the oil and gas sector is about to rebound, equity strategists say.  

One of the latest bullish voices came from JP Morgan this week.

“We believe favorable technicals, improving fundamentals with stabilizing business cycle, and ongoing geopolitical tensions in the Middle East could help redirect flows into this universally hated and cheap sector,” JP Morgan’s U.S. equity strategist, Dubravko Lakos-Bujas, said in a note to clients, as carried by CNBC.

So far this year, the energy sector has widely underperformed the S&P 500 index. According to Yardeni Research, Inc, the energy sector has gained 3.9 percent year to date to September 26, compared with an 18.8-percent increase in the S&P 500 index. Energy was the second worst performer among the major sectors in the S&P 500, with only health care trailing it with a 3.7-percent gain.

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JP Morgan expects energy stocks to rebound over the next year, thanks to the improving global economy and a stabilization of the business cycle—a somewhat contrarian view to the bears who see a recession and massive stock market drops just around the corner.

“With renewed synchronized global monetary easing and stimulus underway, liquidity conditions are starting to improve, which often leads to actual economic growth by about six months,” Lakos-Bujas wrote in his note, as carried by Barron’s.

It’s not only the economy that makes JP Morgan bullish on energy.

While investors continue to steer clear of the sector, insiders are buying energy stocks, which typically points to executives believing in the value of the investment at a bargain price.

And oil and gas stocks are trading at bargain prices right now, JP Morgan says.

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“Absolute and relative valuations are at lows with small-cap E&Ps [exploration & production] trading below book value and at price levels seen almost 25 years ago,” Lakos-Bujas said in the note, Yahoo reports.

“In contrast, corporate sentiment is bullish with insider purchases rising to cycle highs and shareholder return at ~6% with stronger buyback announcements and higher dividends,” according to the equity strategist.

Higher oil prices will also help the energy sector over the next year, JP Morgan says. The investment bank sees oil price rising to US$80 a barrel in 2020—contrary to many forecasts of continued low oil prices because of an expected oversupply on the market.

With higher oil prices and the global economy stabilizing, JP Morgan expects energy stocks, especially those of exploration and production (E&P) companies, to be one of the main beneficiaries of the more stable business cycle.

JP Morgan’s bullish view may seem contrary to the doom-and-gloom scenarios that many analysts have painted over the past months, but it’s certainly not the only bullish voice on Wall Street.

Goldman Sachs has just said that it sees U.S. energy stocks as a buying opportunity at bargain prices right now. The energy sector has the potential to post the biggest gain over the next 12 months, Wall Street sell-side analysts and stocks experts said last month.

The sector has started to show some signs that oil and gas stocks may be close to breaking out of the downward trend. The recent selloff in energy stocks and energy-tracking funds may have been overdone, Jonas Elmerraji, senior market analyst at Baltimore-based Agora Financial, said earlier this month.

By Tsvetana Paraskova for Oilprice.com

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