Energy stocks are undervalued, some analysts say.

Callaghan O’Hare/Bloomberg

Energy stocks were the S&P 500’s top performers last year, rising 48%. They’re leading the pack again in 2022, up 35%. But even those massive jumps aren’t enough to reflect the true value of the companies, some strategists say. 

The profits of energy companies in the S&P 500 are expected to skyrocket 281% year over year in the first quarter, and account for 7.8% of total S&P 500 profits. They’re expected to stay at or above 8% of total S&P 500 earnings for the next two quarters, according to S&P Global. Nonetheless, those stocks make up just 4.1% of the index, giving them a relative underweighting. 

Energy stocks fell to a 2% weighting of the S&P 500 in 2020, and have climbed back. But they arguably haven’t climbed back enough given their increasing earnings power. In the past, energy has made up a much larger portion of the S&P 500. Over the past 20 years, the sector’s weight has averaged 8%, and in 2008 it was 16%.

Some strategists think that energy stocks are bound to catch up. 

“For a sector that is a direct input into every segment of the economy and a natural hedge against geopolitics and inflation, in our view Energy’s earnings stream is worth more than current price to earnings ratio of 9.5 times,” wrote J.P. Morgan strategist Dubravko Lakos-Bujas, who says the firm has more conviction about the possible gains in energy than any other sector.

Energy has traded at an average valuation of 16.5 times earnings since 1990, Lakos-Bujas points out.

For investors looking for energy stocks that have been left behind, there are several in the S&P 500 with particularly low valuations. Some even trade for less than 8 times their expected earnings over the next year. That group includes APA Corp. (ticker: APA), Diamondback Energy (FANG), Marathon Oil (MRO), Occidental Petroleum (OXY), ConocoPhillips (COP), Devon Energy (DVN), Coterra (CTRA), EOG (EOG) and Pioneer Natural Resources (PXD).

Write to Avi Salzman at avi.salzman@barrons.com

Source: finance.yahoo.com