Why Energy is Catching the Market’s Eye

By Frank Holmes
CEO and Chief Investment Officer

U.S. Global Investors

Over the last month the energy sector has outperformed the market, and as you can see in the chart below, has done so by 6.5 percent. Year-to-date the sector is beating the S&P 500 Index by over 3 percent.

In a spectacularly performing market during 2013, energy lacked some of the incredible performance seen throughout the other sectors, but recently it has turned up, catching the attention of the market yet again.

Greek 10-Year Government Bond Yields Back to Pre-Crisis Levels
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What’s causing this sudden shift in relative strength?

As our Director of Research John Derrick describes in our recent video on the Periodic Table of Sector Returns, it is not unusual to see sectors move from top to bottom from one year to the next. For example, energy ranked as one of the top-performing sectors from 2004 through 2007, but quickly lost momentum in 2008 when it was hit the hardest after the financial crisis. In 2012 and 2013 energy turned in some solid numbers, but lagged in comparison to the other sectors.


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Energy Greek 10-Year Government Bond Yields Back to Pre-Crisis Levels
Energy

In looking at an overview of market performance, it’s important to recognize what caused the moves. For example, one reason the energy sector is climbing back up, could be due to the broader market rotation that we’ve noticed recently, from growth stocks to value stocks.

Growth stocks are generally successful companies that are expected to continue growing their earnings, usually at a rate that outpaces the market, causing investors to pay more for them. Value stocks rarely outpace the market as much as growth stocks do. Investors see potential in buying these cheaper names, ones that trade at lower price-to-earnings (P/E) ratios than the S&P average, because they still have the potential to significantly outperform over time.

As I mentioned, in the past few weeks high-growth names have pulled back, while value names are steadily gaining momentum. One of the main reasons for this rotation is that some investors view the valuations of growth names as too high, especially in comparison to the value companies.

What’s significant is that many of these value names happen to be in the energy sector. We’ve taken advantage of this shift to value in our Global Resources Fund (PSPFX) through names like Pacific Rubiales and Valero Energy.

Although this rotation is important to the recent moves in energy, it is not the only factor driving the sector up. Take a look at the price of oil and natural gas.

Currently natural gas prices are starting to stabilize while the price of West Texas Intermediate (WTI) crude oil is up by 4 percent year-to-date, reaching $104 a barrel just this week. This price increase in WTI is linked to concerns over future supply, but nevertheless higher oil prices bode well for stocks within the energy sector.

According to the Energy Information Administration (EIA), short-term projections for the price of WTI remain relatively high. Additionally, the group commented that, “Aside from seasonal issues, the EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.4 million barrels per day in 2013 to 8.4 million barrels per day in 2014 and 9.1 million barrels per day in 2015.” This projection is good for North American producers and service companies.

So how can you gain entry into this energy opportunity?

The portfolio managers and I continue to stay focused on companies that show robust fundamentals and are located in sectors showing strength. Currently, within our Global Resources Fund (PSPFX), we are seeking to capture the latest takeoff in the energy sector through our exposure to companies that appear reasonably valued. In addition to the two I mentioned previously, if you look at the fund’s top 10 holdings you will also see our investments in large-cap names like Schlumberger, EOG Resources and Halliburton.

Are you ready to energize your portfolio? I believe a well-diversified portfolio includes exposure to natural resources. In fact, I am in Tirana, the capital city of Albania, where I have had the opportunity to expand my tacit knowledge by visiting several resource companies.

I am excited to share my journey with you next week when I return home!

Index Summary

  • Major market indices finished higher this week.  The Dow Jones Industrial Average rose 2.38 percent. The S&P 500 Stock Index gained 2.71 percent, while the Nasdaq Composite advanced 2.39 percent. The Russell 2000 small capitalization index rose 2.38 percent this week.
  • The Hang Seng Composite fell 1.16 percent; Taiwan gained 0.41 percent while the KOSPI declined 0.27 percent.
  • The 10-year Treasury bond yield rose 9 basis points to finish the week at 2.72 percent.

Domestic Equity Market

The S&P 500 Index rose 2.71 percent, bouncing back this week after suffering its worst weekly decline since 2012 last week. Utilities were the only sector to eke out a gain as bonds rallied and money flowed into defensive areas of the market. The energy sector led the way, and has emerged as the new leader in the market over the past month.

S&P Economic Sectors
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Strengths

  • The energy sector rose 4.67 percent this week as there was ubiquitous strength in virtually every industry group, including refiners, energy service and exploration and production.
  • The industrials sector also exhibited strong performance with every index constituent up for the week. Leaders included Textron, Ingersoll-Rand and Kansas City Southern.
  • Micron Technology was the best performer in the S&P 500, rising 13.16 percent this week. Flash storage competitor SanDisk reported after the close on Wednesday, topping expectations and raising margin forecast; this news bodes well for Micron.

Weaknesses

  • Weakness was seen in the managed care stocks. UnitedHealth reported weaker-than-expected revenues and higher costs for a new Hepatitis C therapy but this report dragged down the entire group.
  • Computer and electronics retailers were also weak with Best Buy’s news that the company’s U.S. retail chief is retiring, along with a profit warning from a competitor.
  • Intuitive Surgical was the worst performer in the S&P 500 for the second week in a row, falling 6.29 percent. Last week, the company announced that sales of its robotic surgery systems fell sharply in the first quarter, coming up well short of expectations. This week’s move appears to be continued fallout from that news.

Opportunities

  • The current macro environment remains positive as economic data is robust enough to give investors confidence in an economic recovery, but not too strong as to force the Federal Reserve to aggressively change course in the near term.
  • The selloff in high-quality companies offers an opportunity to pick up companies with robust
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