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Energy Stocks

The Case for Energy Stocks in 2018

By Elliott H. Gue, on Jan. 26, 2018

Quantitative and so-called smart beta strategies that select stocks based on specific fundamental characteristics, or factors, have become increasingly popular in recent years.

Two of the biggest factors are value versus growth stocks. The metrics used to identify value and growth companies differ; however, value stocks usually exhibit low price-to-earnings, price-to-sales, or price-to-book ratios relative to the broader market. Growth stocks increase their earnings and sales at an above-market rate over a period of time.

Historically, value stocks perform best when the economy grows at a steady clip or accelerates. Many value names operate in cyclical sectors or industries that need a push from a strengthening economy to generate meaningful earnings and sales growth.

Growth stocks, in contrast, can deliver on these metrics during periods of lackluster growth.

Smart Beta Inflows

This graph shows the total net assets invested in smart-beta exchange-traded funds (ETF)—a relatively small piece of the quantitative-investing pie. By the end of 2017, these ETF held more than $700 billion in assets under management.

When investors worried about the state of the US economy from March through August 2017, growth stocks led the market. In fact, many investors took money out of value-oriented smart-beta ETFs over this period.

Value vs Growth

But expectations had shifted by September 2017. US economic growth picked up from a slow start in the second and third quarters, while some of our favorite forward-looking indicators signaled that growth could accelerate. Against this backdrop, fund flows have returned to value-oriented fare since last summer.

As one of the largest value-oriented sectors and the market, the energy sector should benefit from further inflows to value funds. Energy stocks are off to a strong start this year, and we expect the S&P 500 Energy Index to be among the top third of S&P 500 sectors in terms of total returns this year. Reverting to its mean valuation relative to the S&P 500 would imply 35 percent upside for the S&P 500 Energy Index.

Are You Ready to Ride the Energy Wave in 2018?

If you don’t have a subscription to Elliott Gue and Roger Conrad’s Energy & Income Advisor, you might as well be standing on the beach in a snowsuit instead of a wetsuit. And do you even have a surfboard?

Give Energy & Income Advisor a risk-free trial today and learn about where to catch the best waves in the energy patch. For you first surf lesson, check out Elliott and Roger’s Focus List from the most recent issue for 15 stocks to buy now.

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