Energy outperformance has cooled recently, which was to be expected after an historic run of outperformance from January to June. But this recent pullback was certainly not due to company fundamentals and sentiment which is under a major secular shift. Monitoring 2022 EPS growth we can see that S&P 500 earnings growth for 2022 has remained very steady at 9-10% growth; but if we strip out energy that growth crashes to 3%. Energy accounts for roughly 70% of all S&P 500 earnings growth YTD, which is remarkable considering its tiny 4% weight in the index.
Additionally, it is easy to see a secular shift in fundamentals as measured by cash flow. US shale companies for the better part of a decade ran free cash flow negative but that picture has changed dramatically over the last year and ½. Shale companies are bringing in records amount of cash punctuated by an incredibly strong 2nd quarter 2022. This turnaround is also very evident when looking at the majors – three oil companies are now in the top 10 of all S& 500 by cash flow!
Revisiting the stock weakness that we have seen since the beginning of June, stock insiders see this as a great time to purchase additional shares. The red bar to the very far right of the chart below shows the most insider buying of energy stocks back to 2005. Even greater than the March and November 2020 lows which was a fantastic buy point. Anything can happen in the short term, and weakness could continue for now, but we continue to believe the insiders are correct and it is a great time to invest in energy companies.
Sean Dillon, CMT, CFTe
SVP, Investment Strategies
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