Energy Stocks Beating the Market

What's causing this sudden shift in relative strength of energy stocks...?

 

OVER the last month, writes Frank Holmes at US Global Investors, the energy sector has outperformed the market.

 

As you can see in the chart below, energy has beaten the market by 6.5%. Year-to-date the sector is beating the S&P 500 Index by over 3%.

 

In a spectacularly performing market during 2013, energy lacked some of the incredible performance seen throughout the other sectors, but recently it has turned up, catching the attention of the market yet again.

 

As our Director of Research John Derrick describes in our recent video on the Periodic Table of Sector Returns, it is not unusual to see sectors move from top to bottom from one year to the next. For example, energy ranked as one of the top-performing sectors from 2004 through 2007, but quickly lost momentum in 2008 when it was hit the hardest after the financial crisis. In 2012 and 2013 energy turned in some solid numbers, but lagged in comparison to the other sectors.

 

 

In looking at an overview of market performance, it's important to recognize what caused the moves. For example, one reason the energy sector is climbing back up, could be due to the broader market rotation that we've noticed recently, from growth stocks to value stocks.

 

Growth stocks are generally successful companies that are expected to continue growing their earnings, usually at a rate that outpaces the market, causing investors to pay more for them. Value stocks rarely outpace the market as much as growth stocks do. Investors see potential in buying these cheaper names, ones that trade at lower price-to-earnings (P/E) ratios than the S&P average, because they still have the potential to significantly outperform over time.

 

As I mentioned, in the past few weeks high-growth names have pulled back, while value names are steadily gaining momentum. One of the main reasons for this rotation is that some investors view the valuations of growth names as too high, especially in comparison to the value companies.

 

What's significant is that many of these value names happen to be in the energy sector. We've taken advantage of this shift to value in our Global Resources Fund (PSPFX). But although this rotation is important to the recent moves in energy, it is not the only factor driving the sector up. 

 

Take a look at the price of oil and natural gas. Currently natural gas prices are starting to stabilize while the price of West Texas Intermediate (WTI) crude oil is up by 4% year-to-date, reaching $104 a barrel just last week. This price increase in WTI is linked to concerns over future supply, but nevertheless higher oil prices bode well for stocks within the energy sector.

 

According to the Energy Information Administration (EIA), short-term projections for the price of WTI remain relatively high. Additionally, the group commented that, "Aside from seasonal issues, the EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.4 million barrels per day in 2013 to 8.4 million barrels per day in 2014 and 9.1 million barrels per day in 2015." This projection is good for North American producers and service companies.

 

I believe a well-diversified portfolio includes exposure to natural resources.