Historic Value in Energy Stocks

Source: Michael Vodicka, Zacks Investment Research  (10/11/11)

"Energy stocks are currently trading at historically low valuations. That provides a unique buying opportunity for anyone bullish on energy."


It always amazes me how hard energy stocks get hit when the market gets nervous. That dynamic has been on display for the last few months, with investors dumping energy stocks by the boat load on concern over slower growth, or even worse, an economic contraction.

The thinking goes that slower growth means sharp declines in demand for energy resources like crude and gasoline, therefore pushing estimates and earnings lower. Under normal circumstances that might be true, but the energy market is anything but normal.

Supply Limited

The relationship between supply and demand is already incredibly tight as existing crude reserves below the ground become more difficult to extract and consumption ticks higher on emerging market growth. That means even marginal demand growth has a serious impact on supply and prices.

Is Consumption Elastic?

Here's another thing to consider. How elastic is energy consumption? Even if the domestic or global economies fall back into a recession, does that mean people will stop driving their cars and heating their homes? Absolutely not. Energy is one of the last places anyone can afford to pull back on because it's an essential component of everyday life.

Inflation

And don't forget the inflation component. With the Fed committed to a long-term strategy of devaluing the dollar to stimulate exports and the economy, hard assets become a bastion of safety and wealth preservation. Crude is at the top of that list.

But investors don't seem to care about that right now, because energy stocks are one of the worst performers of the last two months on profit taking and sector rotations. And it has created incredible opportunity, with more than a few good stocks trading at historically low valuations.

The Take Away

Energy stocks are currently trading at historically low valuations. That provides a unique buying opportunity for anyone bullish on energy.

Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Surprise Trader Service.

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