What is the energy sector?
It includes exploration, drilling and mining, refining and marketing, storage and transportation of oil, natural gas and coal.
Oil prices have now retreated from a spike in prices following the Middle East skirmishes. The rapid retreat is indicative of the oversupply issue that has hampered the industry for some time. In the past, supply disruptions led to persistent price increases, as did flare-ups in geopolitics—but in the age of fracking, lower OPEC market share and increasing North American production, the duration and degree of price shocks have been greatly diminished. Beyond the secular issues that the sector faces, potentially stabilizing but still-tepid global growth is not likely to offer much support to the sector.
The recent fall in the value of the U.S. dollar did little to support the energy sector amid the pullback in oil prices, resulting in weak relative performance, compounding multi-year underperformance. While this has led to attractive valuations from a historical perspective, very poor fundamentals lead us to believe that it’s a value trap.
The secular outlook for the sector is challenged from a fossil-fuel perspective, and the shift towards renewables by the major energy companies is not likely to offer any short-term relief. However, given the ongoing probability of geopolitical escalations, we maintain a marketperform rating on the Energy sector.
Sector Overview: Energy is positive on Macro and Value; negative on Fundamentals and Relative Strength
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or anticipated tax legislation.
Source: Charles Schwab, as of 01/23/2020.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Energy sector.
* As represented by the S&P 500 index
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