A large increase in the energy sector is responsible for most of the year-to-date returns in the S&P 500 this year, but investors are continuing to ignore the sector, according to a new analysis from Bank of America.
The recent astronomical 92% return on their investment has pushed energy’s weight to 3%, according to a message sent to investors on Thursday.
According to strategists led by Savita Subramanian, constrained supply and rising demand could mean “upward pressure on oil in the near term.”
“If Energy doubled again, while all other sectors saw average returns,” the firm said, “investors with no Energy exposure would sacrifice a full 3 [percentage points] of alpha, more than obliterating relative gains of 59 [basis points] this year.” A basis point equals 0.01 percent.
ESG funds, which invest with a focus on environmental, social, and corporate governance factors, are particularly vulnerable to underperformance, as 70% of sustainability-focused funds underweight the sector.
Bank of America examined fund managers’ holdings and discovered that Baker Hughes is the most overweighted stock in the energy sector, followed by EOG Resources, Hess Corporation, and Pioneer Natural Resources. Portfolio managers, on the other hand, have very little exposure to Kinder Morgan, Oneok, and Marathon Petroleum.
Part of the energy sector’s recovery this year can be attributed to a rebound in demand for petroleum products as economies around the world reopen. On Friday, West Texas Intermediate crude futures reached their highest level since October 2018, bringing the year-to-date gain to nearly 100%. Of course, WTI started from a low point after falling into negative territory for the first time on record in April 2020, but the recovery since then has been notable.
However, energy stocks have lagged behind, rising only 42% in the last year.
“These companies will make more money, but their stock prices may not,” said Bryan Benoit, Grant Thornton’s U.S. national managing partner. Even though oil and gas prices are rising, there isn’t a lot of money chasing energy stocks.
“The reason for this is that investors see headwinds with ESG, and oil and gas stocks are not as popular with funds as they were in the past,” he explained.
While the sector may be less popular in terms of how few funds own these stocks overall, investors are still finding value in the space.
“Does it get any higher? The answer is unequivocally yes… “I have no problem putting new capital into energy right now because the path in the near term is going to be higher,” Joe Terranova, senior managing director at Virtus Investment Partners, said recently “Halftime Report.” He mentioned Pioneer Natural Resources as being appealing following its acquisition of Parsley Energy, and he also mentioned Suncor and Cheniere as stocks with potential upside.
According to NewEdge Wealth managing partner Robert Sechan, investors can approach the energy sector with ESG in mind. His company recently acquired EOG Resources, which is a “leader in responsible shale production.” “The management team is focused on creating shareholder value [and] leveraging technology to bring an ESG focus to the E&P space,” he explained, referring to oil and gas exploration and production.
In the energy sector, Jim Lebenthal, a partner at Cerity Partners, believes Marathon Petroleum and Kinder Morgan are good investments. He mentioned that Marathon recently completed the sale of Speedway and is using the proceeds to repurchase stock. Meanwhile, Kinder Morgan is “raking in cash” that it could use to repurchase stock, pay down debt, or increase its dividend.
“They’re going up and they’re going to keep going up, so I’m holding them,” he said on “Halftime Report” on June 2.
A buying opportunity has appeared for Oatly as of late, but Wall Street experts remain split on whether investors should invest in the stock today.
Following the recent initiations, it was revealed that Wall Street is divided on how to value Oatly. Jefferies, which was involved in Oatly’s IPO, has a buy rating and one of the highest price targets on the stock at $34 per share. Guggenheim Securities is similarly bullish at $32 per share and projected significant growth for the company.
“The company is in the early stages of a long-term growth story that could generate double-digit annual sales growth for at least the next 10 years if it continues to invest heavily in capacity expansion,” Guggenheim said in a note to clients.
JPMorgan, however, gave the stock a neutral rating and a $24 price target, saying that competition in the space is sure to increase and clouds the outlook for the company.
“Oatly may have to raise more capital within a couple of years, and we view the stock as slightly overvalued (with volatility likely ahead). All in, we are impressed by Oatly’s fundamentals and potential but would wait for a better entry point,” the JPMorgan note said.
Similarly, Morgan Stanley gave the stock an equal weight rating, saying that long-term growth was already priced in.
Here are the analyst ratings and price targets from the latest initiations on Oatly:
- Jefferies: Buy, $34 target
- Piper Sandler: Overweight, $30 target
- JPMorgan: Neutral, $24 target
- Guggenheim: Buy, $32 target
- Morgan Stanley: Equal weight, $29 target
- Credit Suisse: Outperform, $30 target
- Oppenheimer: Perform, no target