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Energy stocks are having a big month as renewed hostilities between the U.S. and Iran have sent oil prices surging — but it’s not solely the conflict in the Middle East that makes the sector appear so attractive to investors.
The S&P 500’s energy sector has jumped 10.5% in July through Tuesday. That puts it on track for its biggest monthly climb since January — exceeding even its March rally when oil prices began surging after the start of the Iran war, according to FactSet data. Energy is easily the index’s best-performing sector so far this month, helping to fuel a gain of 30.4% so far this year.
“Even with strong and more stable fundamentals, energy is the cheapest group” in the S&P 500 by “a wide margin,” said Nicholas Colas, co-founder of DataTrek Research, in a note shared with MarketWatch Tuesday. “We like the sector here, and not just as a hedge against near-term Mideast tensions.”
The energy sector is trading at 13.4 times forward earnings, or earnings estimates over the next 12 months, which is well below the S&P 500’s price-to-earnings multiple of 20.3, the DataTrek note shows. In the table below, Colas looked at the largest weightings in the sector by company as well as price-to-earnings ratios, saying “the group’s low valuation is common to almost every top name, not the result of a few very low-multiple stocks.”
“The fact that energy-sector profitability is deeply affected by commodity prices explains low valuations, but high dividend payouts and resultant yields show that these companies have capital discipline,” said Colas. “These are companies with a very well-established playbook for returning capital to shareholders, and they are sticking with it.”
Basically, there’s no uncertainty about artificial-intelligence-related capital expenditures with this group, Colas added.
Next week, major U.S. oil giants ExxonMobil and Chevron will report second-quarter earnings, with their results scheduled for release on July 31. Shares of ExxonMobil have rallied 11% this month through Tuesday, while Chevron’s stock has surged 15.3% in July, according to FactSet data. Based on the average estimate of analysts polled by FactSet, ExxonMobil is expected to report earnings-per-share growth of 118% from a year ago, while Chevron’s EPS is seen rising 208%.
Among major refiners, Valero Energy is scheduled to report its second-quarter results next week, while Marathon Petroleum and Phillips 66 will release their quarterly earnings reports in early August. Shares of all three companies are trading at record highs, at last check.
Read: America’s oil refiners could more than triple profits as Iran war sparks massive boom
Oil prices in the U.S. rose Tuesday, with West Texas Intermediate crude for August delivery up 2% at $84.91 a barrel, according to Dow Jones Market Data. WTI prices have jumped more than 22% just this month, the data show.
Meanwhile, the U.S. and Iran exchanged attacks for a 10th straight day across the Middle East on Tuesday, according to a report from the Associated Press. “The raging battle continues to take barrels off the market,” said Robert Yawger, a commodity specialist at Mizuho Securities USA, in an emailed note Tuesday.
The State Street Energy Select Sector SPDR ETF a popular exchange-traded fund that focuses on stocks in the S&P 500’s energy sector, has surged this year but remains below its 52-week high of $63.46 reached on March 30, FactSet data show.
The U.S. stock market advanced Tuesday, with the S&P 500, Dow Jones Industrial Average and technology-heavy Nasdaq Composite Index all ending higher. Energy was the S&P 500’s second-best-performing sector on Tuesday, with its sharp 1.2% gain trailing information technology’s 2.3% jump, according to FactSet data,.
In a market that appears to be driven by “fear and greed” at the same time, it’s important for investors to remain diversified in their portfolios so they remain resilient in volatility, Rachel Aguirre, Vanguard’s head of product and portfolio strategy, told MarketWatch in an interview.
Claudia Assis contributed.
