Bank of America believes that rising oil prices will drive major outperformance among Energy Sector stocks in the next year. In a report out Tuesday, analyst Savita Subramanian explains why Bank of America upgraded energy stocks to Overweight.
According to Subramanian, the bullish energy thesis revolves around a sharp recovery in WTI crude oil prices to $54/bbl by the end of 2016 and $69/bbl by June 2017. With WTI trading at around $46/bbl on Wednesday, Bank of America’s price target represents roughly 50 percent upside for oil within the next year.
“Historically, when oil has rallied over 25%, Energy has outperformed the market nearly 90% of the time, with average outperformance of 11ppt,” Subramanian writes.
Subramanian adds that Energy’s underperformance during the bull market since 2009 has pushed its weighting in the S&P 500 below 7 percent. There has never been a time in history when Energy’s S&P 500 weighting has been this low and the sector didn’t outperform the market in the three years that followed.
While Energy Sector stocks currently trade at a lofty 40x forward PE ratio, Subramanian believes a wave of upward earnings revisions is already underway. In fact, the Energy Sector saw the largest improvement in earnings estimate revisions of any market sector in the month of July. Given the firm’s thesis of rising oil prices, Bank of America expects these upward earnings revisions to continue throughout the next year.
Although Subramanian doesn’t mention any specific stocks, traders should consider the United States Oil Fund LP (ETF) USO and the Energy Select Sector SPDR (ETF) XLE.
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