From OilPrice, October 26:
- Energy stocks remain cheap despite the huge runup this year.
- Oil stocks have continued to show a clear disconnect from the commodity they track.
- The energy sector is reporting the greatest increase in net profit margin compared to the 5-year average.
Oil stocks have continued to show a clear disconnect from the commodity they track, with oil equities staging a powerful rally even as oil prices have fallen since the OPEC meeting. Over the past 30 days, the energy sector’s leading benchmark, the Energy Select Sector SPDR Fund (NYSEARCA: XLE), has climbed 24.6% while average crude spot prices have declined 8% over the timeframe. XLE now boasts a 52.9% return in the year-to-date compared to a 20.0% decline by the S&P 500.
There’s a method to the madness, though.
We are still in the early innings of Q3 2022 earnings season, but so far it’s shaping up to be better-than-feared. According to FactSet’s earnings insights, for Q3 2022 (with 20% of S&P 500 companies reporting actual results), 72% of S&P 500 companies have reported a positive EPS surprise and 70% have reported a positive revenue surprise, with both figures higher than earlier projections.
The energy sector is reporting the greatest increase in net profit margin compared to the 5-year average (14.6% vs. 6.8%). Whereas oil and gas prices have declined from recent highs, they are still much higher than they have been over the past couple of years hence the ongoing enthusiasm in the energy markets. Indeed, the energy sector remains a huge Wall Street favorite, with the Zacks Oils and Energy sector being the top-ranked sector out of all 16 Zacks Ranked Sectors.
Unfortunately, the energy sector is also leading in one unwanted metric: downward revisions. Downward revisions to revenue estimates by Big Oil companies including Chevron Inc. (NYSE: CVX) from $60.8 billion to $57.4 billion, ConocoPhillips (NYSE: COP) from $19.8 billion to $18.0 billion, Exxon Mobil (NYSE: XOM) from $106.0 billion to $104.6 billion, and Phillips 66 (NYSE: PSX) from $40.5 billion to $39.4 billion have been substantial contributors to the decrease in the revenue growth rate for the sector. As a result, the blended revenue growth rate for the energy sector has decreased to 32.2% from consensus projection of 35.5% just a month ago. According to analysts, most companies in the energy sector are revising their revenue and earnings estimates downwards mainly due to high volatility in the energy markets. For instance, Shell Plc (NYSE: SHEL) recently issued a weak trading update:....
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