Drilling for Value
The energy patch looks attractive from a relative valuation perspective.
It can be challenging to find attractive investment opportunities in a market that is at (or near) all-time highs. It has been an excellent year for equities, as the S&P 500 Index has soared more than 27% through mid-December. Now, with a price/fair value of 1.01, according to Morningstar equity analysts, the S&P 500 currently appears to be fairly valued.
Some sectors have fared better than others. Taking a step back to view the market through a sector lens reveals that the energy sector has trailed the broader market this year and is currently trading at a 6% discount to Morningstar's fair value estimate. Energy stocks also have the lowest price/earnings, price/sales, and price/cash flow ratios of any equity sector. Along with its attractive relative valuation, the sector is also in solid financial condition. In fact, the energy sector's debt as a percentage of total capital is the lowest of any sector. Yes, that even includes technology stocks.
John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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