Investor Insights:
- Since 2014, this sector has posted the worst or second-worst return each year — except for one.
- I believe these stocks will have a run higher soon.
- There’s one way that I like to play this sector. I suggest you check it out.
Energy stocks have been putrid.
Over the past six years, they’ve posted the worst or second-worst return each year — except for one.
The table below shows the recent annual returns of the S&P 500 Index by sector. The final column shows year-to-date prices through December 3.
If you’re looking for the most hated sector, it’s not even close:
(Source: Bloomberg)
Along these lines, one question most investors have been confronted with is this: Should you buy something just because it’s cheap?
The answer … unequivocally … is NO!
Did I say that loud enough?
But there’s another concept to consider in investing.
And it explains why it can be valuable to know what’s cheap.
Don’t Run From Energy Stocks
The energy sector had the best returns in three of the years from 2000 to 2008. And the third best in two more.
Its returns in those years were never worse than sixth.
The theory of reversion to the mean suggests asset prices will eventually return to their historical average.
Does that mean energy stocks will outperform every other sector going forward?
Of course not.
But the sell-off that we’ve seen in these stocks has created some interesting scenarios today.
The stocks in this sector currently yield more than 4% on average. That hasn’t happened since 1994.
And the free cash flow yield of the sector is greater than it has been since 2005. That’s the free cash flow generated by these companies as a percentage of their market caps.
The Smart Way to Play the Energy Sector’s Comeback
My point isn’t that fossil fuels are the future.
We’re making some amazing progress on a future powered by things other than oil. That has contributed in part to the weakness of this sector.
And I’m not suggesting that energy stocks are going to go on a multiyear win streak.
But I believe the energy sector will have a run higher.
Maybe it’ll only last a year, like we saw in 2016. It could be shorter. But I believe it will happen.
I suggest you wait until energy stocks begin an uptrend. That could happen as soon as the start of the new year.
One way that I like to play this sector is the American Energy Independence ETF (NYSE: USAI).
It has outperformed both the overall energy sector and ExxonMobil since it went public in 2017.
The exchange-traded fund (ETF) focuses on the pipelines that store and ship energy. Its third-largest holding, Oneok, has the second-best return of any stock in the energy sector this year.
USAI currently pays a 7.3% yield. And management has been raising that payout each quarter since the fund went public.
This is a smart way to play the reversion to the mean in the energy sector.
Good investing,
Editor, Profit Line
P.S. My colleague Jeff Yastine is known for finding unique ways to make fortunes in the stock market. And in his new presentation, he reveals how a $0.02 envelope could open the doors to a $1,024,000 windfall. Go here to see all the details.