Time To Buy 'Big, Old And Ugly' Energy Stocks?
Bank of America released a new report this week with its updated take on the energy sector.
According to the report, analysts now believe that the bottom is in for crude oil prices, and it’s time to start selectively buying back into energy stocks.
The Worst Is Over
Bank of America has been on the sidelines when it comes to energy stocks for quite some time based on the downside risk to oil prices. However, analysts now believe that the $43/bbl bottom in WTI prices earlier this year represents the low point in the oil collapse.
Bank of America is now calling for $57/bbl WTI in 2016 and $75/bbl in the longer-term.
Based on the latest projections, Bank of America has raised its rating on the energy sector to Overweight.
Historically Low Valuations
Despite the recent surge in energy sector stocks, analysts point out that energy’s relative price-to-book ratio remains near all-time lows. They point out the parallels between current valuations and valuations during the oil price collapse in 1986.
Buying energy at that time resulted in major outperformance over the following year.
Timing Is Everything
- Both positioning and sentiment in the energy sector has fallen to record-low levels lately. Although analysts believe that the tide is now turning, they caution that risks in energy still remain.
- “Estimate revisions have potentially bottomed, but another leg down in oil could pressure the stocks, as would a stock market correction in China highlighted as a heightened risk by our global colleagues,” analysts explain.
Bank of America likes “big old and ugly” energy stocks because they are the most under-owned, have minimal sensitivity to oil prices and offer compelling valuations and dividends.
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