To all those investors and advisors shying away from energy stocks because of their underperformance this year and last, Sam Stovall, U.S. equity strategist at S&P Capital IQ, has a message for you: Don’t.
“There comes a point in which a group becomes so unloved that it begs to be bought and put away for an eventual recovery,” Stovall writes in his latest U.S. Equity Research Sector Watch note. “Today, global energy stocks could be making that same plea.”
Over the past year the S&P Global 1200 Energy Sector Index has fallen 22.4% while the broader S&P Global 1200 index has gained 1.87%. The energy sector, which peaked in 2008, is trading well below its average — more than two standard deviations below — which may represent a long-term buying opportunity, writes Stovall.
He recommends that investors combine purchases of energy stocks with purchases of consumer staples and technology, in equal parts. “In the past 10 years, a portfolio consisting of an equal exposure to the S&P Global 1200 consumer staples, energy and tech sectors produced a higher compound annual growth rate than the S&P Global 1200 with lower volatility,” writes Stovall. He calls the portfolio a “free lunch,” getting “something for nothing — higher return with lower volatility.”
Over the past 20 years a hypothetical portfolio evenly divided among these three sectors, rebalanced annually, returned a compound annual growth rate (CAGR) of 8.7%, compared with just 6% for the S&P Global 1200 index, according to Stovall. The sectors are not well correlated and tend to outperform during different phases of the economic cycle.
Consumer staples are defensive, representing companies whose business performance is not closely tied to the health of the economy. Technology stocks are cyclical, tending to do well when economic growth is strong, and energy stocks are a “late cycle inflation hedge,” writes Stovall.