Deep Stock Discounts
Stocks remain on the defensive with the Dow tumbling 1,700 points over the past two weeks.
Still, there are several sectors that look like bargains in terms of cheap valuation and oversold sentiment, and savvy investors are buying the dip in these sectors.
The S&P 500 Energy sector is a perfect case in point.
Year to date, energy sector stocks are down about 10%, while the S&P itself has only fallen 1.5% so far in 2018.
It feels like the stock market has dropped a lot more than one-and-a-half percent!
Energy stocks were leading the pack in performance earlier this year, but fell of a cliff thanks to plunging oil prices.
Energy stocks can’t catch a break. In spite of stellar earnings growth, crude oil prices have collapsed 30% from their recent peak, falling from over $75 a barrel in October, to the low $50s today.
It’s no surprise energy stocks have tumbled too. That’s in spite of energy sector profits growing 127% in the third-quarter, while top-line sales jumped a stunning 21%, more than twice that of the S&P 500 overall.
Therein lies the opportunity for savvy investors. The recent correction in energy stocks, coupled with stellar sales and earnings growth this year, means energy shares are dirt-cheap right now, as you can see above.
In fact, as BlackRock analyst Russ Koesterich recently pointed out: “Based on price-to-book (P/B) the energy sector is now trading at the largest discount to the S&P 500 since at least 1995.”
That’s a 50% discount to the overall stock market, even though energy sector earnings are growing twice as fast!
And energy sector profits are expected to double once again in the current fourth quarter, followed by earnings growing another 26.4% in 2019.
That’s well ahead of the 9-10% profit growth forecast for the overall stock market.
As a result, energy stocks are trading at 13.7 times next years earnings, one of the cheapest sectors in the stock market.
By comparison, the entire S&P 500 is priced at nearly 16-times next year’s profits.
Plus energy and materials stocks, because they are commodity producers, offer you protection against rising interest rates and inflation, which is indeed the current climate right now.
Bottom line: For my money, once the dust settles after this correction, energy stocks will offer one of the best bargain buying opportunities on the market. But that’s not the only one…
In tomorrow’s Wealth Watch, I’ll alert you to another sector that’s so cheap it’s even peaked buying interest from the Oracle of Omaha!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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