The energy sector has been the best performer in the US equity market this year, but it's not too late to get in as the setup for the economy to reopen is still attractive.
Energy recovery still has a long way to go
The S&P 500 energy sector
for 2021 by the end of May increased by 36%. (All price changes in this article exclude dividends.) This is the best sector performance in the benchmark index so far this year.
Stretching the timeline draws a different story:
Pay without dividends.
If we look at price changes from late 2019 – before the coronavirus pandemic hit demand for West Texas crude oil
so strong that the futures contracts on monthly dates slipped briefly into the red – the energy sector is the only one not posting any noteworthy gains.
The long-term numbers are even worse, underscoring that energy producer stocks have not yet returned to their pre-major oil price crash that began in the summer of 2014.
The table shows price changes for the full S&P 500
and the Dow Jones Industrial Average
The Dow was stalled because it owned both Exxon Mobil Corp.
and Chevron Corp.
for most of those periods, until Exxon was removed from the group of 30 blue chip stocks last August.
There has been a shift towards cyclical sectors of the stock market this year as some investors feared that rising consumer prices could cause the Federal Reserve to reverse its stimulus policies, which have helped prop up the U.S. economy, and keep interest rates and borrowing costs down .
Consumer prices rose by 0.8% in April compared to the previous month and by 4.2% compared to the previous year. That was the biggest year-on-year price jump in 13 years.
During an interview last week, Michael Arone, chief investment strategist for State Street Global Advisors' US SPDR Exchange Traded Funds business, said investors should keep an eye on the job market for signals as to when the Federal Reserve may and may not slow down its bond purchases Long term interest rates can be wise. He expects our current expansion cycle, favoring energy stocks and other cyclical sectors, to last through early 2023.
Energy inventory screen
For a list of energy stocks, it helps to expand beyond the S&P 500. The energy sector now makes up just 2.8% of the index's market capitalization, down from 7.1% five years ago.
To expand the list beyond the 23 stocks in the S&P 500, we started with the S&P Composite 1500 Index
which is made up of the S&P 500 and the S&P 400 Mid Cap Index
and the S&P Small Cap 600 Index
That increased the full list of stocks in the energy sector to 62 companies.
Then we added another group of energy stocks – Master Limited Partnerships, or MLPs, which are primarily income instruments. As limited partnerships, these investments forward income (and capital losses) from pipelines, fuel storage facilities, and transportation companies to shareholders who receive K-1 forms instead of 1099 dividend income reporting forms. That makes tax preparation more complicated. MLPs are not included in the S&P indices.
One way to invest in this group of energy stocks is with the Alerian MLP ETF
who holds 17 MLPs. The ETF pays a quarterly dividend and eliminates the tax complications associated with directly owning MLPs. The current dividend yield is 8.84%, which reflects the low MLP prices. (AMLP's share price increased 36% from 2021 to May 28 excluding dividends. However, it was up 15% from the end of 2019, 21% over five years, and 67% over 10 years earlier.)
Wall Street favorites
Starting with our full list of 79 energy stocks (the 62 in the S&P Composite 1500 Index and the 17 in the AMLP), here are the 20 that are covered by at least five analysts surveyed by FactSet with a majority “buy” or equivalent that have the highest uptrend for the next year, implied by the consensus rate targets:
Scroll through the table to view all of the data. The list is sorted by the 12 month implied uptrend based on the consensus price targets. Dividend yields are on the far right of the column.
The listed company with the highest 12-month upside potential in terms of price targets is Renewable Energy Group Inc.
which is aptly named because of its focus on biodiesel production and refining.
Chevron made the list. The stock's dividend yield remains attractive at 5.16%, although the stock is up 23% through May 28 this year. But Chevron's arch-rival Exxon didn't make the list after activist investors won last week who won seats in the company to get Exxon to shift its strategy toward one that better supports a long-term move away from fossil fuels Fuels is suitable.
The second company on the list is Energy Transfer LP
which has a dividend yield of 6.16% and analysts expect the partnership's share price to increase 34% over the next 12 months. It is one of four MLPs that made the list.
One pipeline operator who didn't make the list is Williams Cos.
which is up 32% this year through May 28th. Williams is not an MLP – it has a traditional corporate structure. The stocks have a dividend yield of 6.23%, and like Exxon and Chevron, Williams didn't cut its payout during the pandemic. Eighty percent of analysts surveyed by FactSet rate Williams a “Buy” or equivalent, but the company didn't make the list as its consensus price target of $ 28.83 was just 7% above its closing price of $ 26.34 on May 28 lay.
It is important to remember that even during this phase of economic recovery, dividend payouts may be reduced. And although brokerage analysts prefer these stocks, the price targets traditionally only apply for 12 months. That is actually a short timeframe for such a difficult, volatile sector.
Before tying up money – or investing – in any of these energy companies, it is a good idea to do your own research and form your own opinion.
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