According To Strategists, Energy Stocks Trade At Its Current Price Just 5% Of The Time

Are energy stocks really out of favor at the moment, and to what extent?

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Rosenberg Research's founder and president David Rosenberg points out that energy stocks trade at an eight-point discount relative to the S&P 500 SPX, -0.09%, which trades at 18 times earnings. This is a difference seen only 5% of the time.

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Energy stocks have a reputation for being unloved for a reason, of course. As climate-focused investors try to move the world away from fossil fuels, they are shunned by investors who are trying to influence them to do so. In fact, the oil and gas sector is so starved of investment that it is running at about 98% capacity utilization, which is about 20 points higher than that of the broader industrial sector, according to data from the Federal Reserve.

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“Oil is a necessity for the world, period. Though fracking production has leveled off due to regulatory constraints and years of institutional investors backing away, the capital starvation has led to a rapid depletion of new oil supplies," says Rosenberg, a former Merrill Lynch strategist.

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It would be difficult to find a situation more bullish than this in terms of supply relative to demand, according to him.

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Also, he is pointing out that the performance of energy stocks has remained better than the performance of the underlying commodity. Since November, the Energy Select Sector SPDR ETF XLE, 0.27% has fallen by 9% from its highs, while crude has dropped by 40% from its peak in March and natural gas has dropped by 71% from its highs in August. He adds that attractive multiples and strong business fundamentals are acting as an antidote to the current commodity market conditions.

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Rosenberg also suggested that investors look at debt, particularly debt issued by natural gas producers, in addition to the energy ETF. "Don't let the weather-induced drop in commodity prices this year detract attention from what is really important, which is that the entire capital structure of this sector trades at a deep discount compared to earnings and balance sheet fundamentals," he explains.