The S&P 500 Energy Sector index has outperformed the S&P 500 in nine of the past 16 years. The sector also beat the “500″ in 2004 and 2005, as well as for the three-year stretch of 2000-2002. So the question arises: Is there an upswing left to energy?
S&P’s Investment Policy Committee still believes investors should overweight their exposure to the S&P Energy sector, based on a combination of attractive valuations and high earnings visibility amidst a slowing economic environment. We therefore recommend investors take advantage of recent price weakness to add to holdings.
Long stretches of market outperformance are certainly not unheard of for energy stocks. In fact, the S&P Integrated Oil & Gas Sub-Industry index, which currently represents nearly 60% of the weighting of the S&P Energy sector, bested the “500″ nine straight years from 1972-1980.
S&P currently has a positive fundamental outlook on the Energy sector, which is projected to post an 11% year-over-year increase in operating earnings this year. Despite solid estimated per-share earnings growth, the sector sports the lowest P/E in the S&P 500, trading at 10.4 times 2006 estimated per-share earnings, versus 14.9 times for the broader market.
The sector also boasts the highest average S&P STARS ranking of all 10 S&P sectors, based on analyst optimism regarding high earnings visibility and valuation levels.