“Energy stocks look even cheaper relative to the broader market. The sector currently trades at just 0.57 times the P/B of the S&P 500,” according to BlackRock. “This compares favorably to the long-term average of 0.82 and the post-crisis average of 0.76. This is one reason energy stocks are currently over-represented in value indexes.”
Profitability and oil prices, two vital fundamental factors, also bode well for valuations on energy equities. Based on return on equity (ROE), the energy sector looks compelling.
“Today, with WTI crude at approximately $65 a barrel, the energy sector looks approximately 20% undervalued versus the broader market,” notes BlackRock. “A similar picture emerges when comparing current valuations to profitability. Measured by return-on-equity (ROE), profitability also explains about 20% of the variation in valuations. Based on this metric, energy companies appear about 10% too cheap.”
For more information on the oil market, visit our energy category.