| DAILY ISSUE You Could've Doubled Your Money in Two Years in This Neglected Sector Hello, Reader. One of the defining investing stories of for the past nearly two years (beginning in Jan. 2022) is the incredible outperformance of energy stocks.
The outperformance against that of the broader market is staggering. From the lows of August 2021 to yesterday’s close, the Energy Sector (as defined by the Energy Select Sector SPDR Fund (XLE)) has delivered a spectacular total return of more than 100%. Over the same timeframe, the S&P 500 produced a total return of just 6.2%. - S&P 500: 6.2%
- Energy Sector: +100.9%
In other words, you could have doubled your money by betting on oil stocks during this period. By contrast, a $10,000 investment in the S&P 500 during this timeframe would have netted you a gain of just $620.
A lot of investors seem to think a) it’s too late to make good money in energy now; or b) energy – specifically oil and gas stocks – can’t continue to outperform as the world transitions to renewable and greener sources.
It’s okay to be bullish on both old and new energy as this transition plays out. And it’s going to take time.
New demand projections for the next 20 years strongly suggest that “old energy” stocks will continue to make good money for investors, even as new energy stocks continue to grow… The Decades-Long Trend Still Points Higher Simply put, the world needs more energy. Demand continues to grow for all sources, whether they are fossil fuels or renewable energy.
According to Bloomberg… Oil consumption will climb 16% over the next two decades to reach 116 million barrels a day in 2045, about 6 million a day more than previously predicted, the Organization of Petroleum Exporting Countries [OPEC] said in its World Oil Outlook. Road transportation, petrochemicals and aviation will drive the growth, it said. To put a dollar amount on it, OPEC says $14 trillion in investment is needed to keep up with demand that will boom as developing nations' economies and populations continue to grow.
There are two important takeaways from this…
First, demand for oil in wealthier developed nations will eventually begin to taper as the transition to alternative sources unfolds, but OPEC says it will be more than offset by increasing demand in developing countries.
Second, that process will take decades, during which time OPEC expects the predominant sources of global energy will be oil, coal, and natural gas.
Consider also that the Biden administration tapped into the nation’s Strategic Petroleum Reserves (a.k.a. SPR) to try to offset the surge in gas prices last year and counter possible supply disruptions in the wake of Russia’s invasion of Ukraine.
The result is SPR oil inventories have tumbled 60% since the day Russia invaded Ukraine, and now sit at their lowest levels in nearly 40 years. That inventory will need to be replenished at some point, which only adds to demand and the importance of production. Riding the Bullish Tailwinds While electric vehicles (EVs) are having a record year and getting the attention right now, much of the world still runs on oil. Yet the world is producing less. As I wrote nearly two years ago, this supply/demand imbalance provides a bullish backdrop is too compelling to ignore…. According to Rystad Energy, global investments in oil and gas E&P [exploration and production] have plummeted by about 65% since the 2014 peak. This non-spending creates two bullish tailwinds for oil company stocks: - It will reduce future crude production, which could lead to soaring oil prices.
- It will convert the oil sector into a sort of publicly-traded garage sale – an industry that simply sells off what it already owns.
You see, as oil companies slash their spending on exploration and development, their free cash flow will surge. Instead of continuously plowing that cash into future projects, oil companies can drop most of it onto their balance sheets like dollar bills into a shoebox at a garage sale.
Returning to the Rystad Energy data, the world's oil companies are spending half a trillion dollars fewer per year on E&P than they were in 2014. That's a big chunk of change, and as this cash piles up, reported earnings will surge – as will the capacity to "return capital" to shareholders.Those earnings are indeed surging. In the current reporting season, earnings in the Energy sector have grown 137%. Not surprisingly, that leads all 11 sub-sectors os the S&P 500 Index and is lifting the entire market’s earnings growth rate from decidedly negative to positive. According to FactSet… The Energy sector is also the largest contributor to earnings growth for the S&P 500 for the third quarter. If this sector were excluded, the index would be reporting a decline in earnings of 5.3% rather than growth in earnings of 2.2%. When I shared my analysis of oil supply and demand with my Investment Report readers, I recommended one specific opportunity that is now up 45%. I continued to recommend more energy-related opportunities last year and this year, adding several new positions that are up an average of 32%.
I summed up the opportunity well with a good old rock n’ roll analogy… Oil stocks may not be as passe as most folks assume. Like the Rolling Stones, they probably have a few solid performances left in them. If you’ve seen any of the videos of their summer concerts with 80-year-old Mick Jagger still strutting and running around the stage, you know how enticing that possibility is.
Regards, |
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