The overall U.S. stock market has done very well this year, but there are always areas that aren’t doing as well. Out of the 11 areas that make up the S&P 500, the energy sector has done the worst. And at a time when there are constant worries that stock prices are getting too high, comparing the price-to-earnings ratios of different sectors shows what could be a great time for investors to get in.
Researchers from Ned Davis Research, Rob Anderson and Thanh Nguyen, told clients on Thursday that energy was “the most oversold sector relative to the S&P 500 on both a six- and twelve-month basis” based on how prices had been moving.
They also mentioned two things that might make oil go up in price: “Israel’s switch from Hamas to Hezbollah has raised the risk of a larger Middle East conflict and could cause a higher geopolitical risk premium for crude.” The “stimulus blitz” in China could also have a good effect on the demand side of the equation.
“Crude money market short positions have reversed from an extreme high,” they said. “This is a buy signal for oil.”
We can’t say for sure what will happen with oil prices, but U.S. oil companies have had steady cash flow and limited capital spending over the past few years. A lot of the companies’ free cash flow has been used to pay bonuses and buy back shares. With fewer shares, companies can make more money per share, which can help stock prices rise over time. Now is a good time to look at companies’ free cash flow yields and make a list of the ones that might keep doing things that are good for owners.
A big difference in how much energy stocks are worth
The forward P/E ratios for the 11 sectors of the S&P 500 SPX -0.93% as of Friday’s close are shown in this chart. The numbers come from FactSet polling analysts and are weighted by market value. After putting the sectors in order by P/E, the full score is shown at the bottom of the table.
| Sector or index | Forward P/E | Forward P/E one year ago | 1-year P/E increase | Current P/E to 10-year average | 1-year price change |
| Energy | 12.6 | 12.1 | 0.5 | 82% | -5.2% |
| Financials | 15.9 | 13.0 | 2.9 | 111% | 35.9% |
| Utilities | 18.9 | 15.1 | 3.7 | 108% | 33.8% |
| Communication Services | 18.9 | 16.3 | 2.7 | 100% | 41.1% |
| Real Estate | 19.3 | 15.0 | 4.3 | 102% | 31.7% |
| Healthcare | 19.5 | 17.1 | 2.4 | 118% | 18.6% |
| Materials | 20.9 | 16.8 | 4.1 | 124% | 24.6% |
| Consumer Staples | 22.0 | 18.6 | 3.3 | 112% | 21.9% |
| Industrials | 22.5 | 17.9 | 4.6 | 118% | 32.9% |
| Consumer Discretionary | 26.4 | 24.0 | 2.4 | 100% | 29.3% |
| Information Technology | 28.86 | 23.96 | 4.9 | 145% | 52.3% |
| S&P 500 | 21.6 | 18.0 | 3.6 | 118% | 34.2% |
| Source: FactSet | |||||
- Forward P/E ratios for all sectors and the full S&P 500 have risen from a year ago, but the energy sector has shown the smallest increase and remains cheapest by this measure.
- The full S&P 500 trades at a forward P/E of 21.6, up from 18 a year ago. The index’s forward P/E is 118% of its 10-year average.
- The energy sector is the only one of the 11 sectors of the S&P 500 whose forward P/E is below its 10-year average.
