JPMorgan Says Energy Stocks Ready to Gain After Lagging Oil

(Bloomberg) -- U.S. energy stocks are poised to gain after underperforming both oil and the rest of the stock market, according to JPMorgan Chase & Co.

Valuation for the energy sector is at a multi-decade low, while global growth is showing signs of stabilizing with some areas seeing re-acceleration, according to strategists led by Dubravko Lakos-Bujas in an April 5 note. At the same time, there’s strong earnings-growth potential and there could be solid buyback activity this year, they said.

“Energy currently offers the best risk-reward,” the strategists wrote. “In particular, higher beta plays such as Exploration & Production that have de-coupled from oil prices since January.”

JPMorgan Says Energy Stocks Ready to Gain After Lagging Oil

Energy is actually outperforming the S&P 500 this year, gaining 16 percent versus 15 percent for the broader gauge -- but oil has risen about 37 percent to above $62 a barrel. JPMorgan notes that the price-to-oil ratio for an exploration & production index has fallen to a record, and is currently below prior troughs including in the 1990s, the financial crisis low and 2016 intra-cycle slowdown nadir.

JPMorgan also sees commodity-targeting advisers as a potential influence, noting that at times CTA assets account for 20 percent to 30 percent of open interest in oil futures.

“If positive momentum in oil continues over the short-term, systematic signals (i.e. six- and 12-month terms) could reverse from short to long, setting the stage for an even swifter recovery in oil prices,” the strategists said. “Energy stocks could be an outsized beneficiary of this move given a combination of high financial and operating leverage.”

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