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Energy Stocks and Crude Oil Diverge: What to Do Now

It’s no secret that the energy sector has been the best performer this year, as energy companies have experienced stellar revenue and earnings growth. One of the lone bright spots in 2022, energy companies have roared back to life, handily outpacing the broader stock market. And as we’ll see, with both inflation as well as geopolitical pressures continuing to linger, investors are betting that the bullish move may still have room to run.

The Zacks Oils and Energy sector is one of just two sectors that are currently in positive territory on the year, up nearly 43% versus a greater than 16% loss for the S&P 500:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Here’s the fascinating part of this picture. For the first half of the year, energy stocks and crude prices moved more or less in sync. We can use the Energy Select Sector SPDR Fund XLE to represent energy companies in this example. The XLE ETF seeks to provide an effective representation of the energy sector of the S&P 500 Index. XLE constituents are companies engaged in oil, gas, and consumable fuel industries, as well as energy equipment and related services.

As we can see below, through mid-July, the Energy Select Sector SPDR Fund tracked the movement of crude almost to a T:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

But since then, energy stocks and crude prices have shown notable divergence. Here’s the same chart from mid-July to the present. Crude has now come back down to the lows of the year, while XLE is trading near a new yearly high:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

There are two major forces at play that are responsible for the divergence. The first is declining inflation expectations given a weakening consumer and slowing demand. We’ve seen lagging inflation data begin to roll over, suggesting a potential peak in inflation. And as the outlook for consumers who are saving and spending less continues to deteriorate, oil prices have come down well off their peak.

So, we know the reasoning behind lower oil prices. Why the sudden deviation from energy stocks? In a word – earnings. Simply put, energy companies are expected to witness substantial growth in the months ahead, despite oil prices coming down. Going back to our Zacks Oils and Energy sector, companies in this sector are still relatively undervalued while displaying above-average earnings growth:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Let’s take a look at a top-ranked stock within this leading sector.

PBF Energy Inc. (PBF)

PBF Energy is a leading refiner that produces gasoline, diesel, heating oil, jet fuel, and petrochemicals. The company sells its products in the United States, Canada, and Mexico. PBF also provides rail, truck, and marine transportation services. PBF Energy was founded in 2008 and is headquartered in Parsippany, NJ.

PBF sports the highest Zacks Growth and Value Style Scores of ‘A’, indicating the stock is likely to propel higher on the powerful combination of relative undervaluation and sustained earnings growth. The company is part of the Zacks Oil and Gas – Refining and Marketing industry group, which ranks in the top 9% out of more than 250 Zacks Ranked Industries. This group has widely outperformed the market this year, advancing more than 49%.

PBF has surpassed earnings estimates in each of the past four quarters. The refiner reported Q3 EPS just last month of $7.96/share, a 32% surprise over the $6.03 consensus estimate. PBF has delivered a trailing four-quarter average earnings surprise of 48.97%, helping the stock soar more than 240% this year alone.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Analysts are in agreement in terms of earnings revisions and have increased their estimates across the board.  For the fourth quarter, analysts covering PBF have increased their estimates by 54.93% in the past 60 days. The Q4 Zacks Consensus EPS Estimate now stands at $5.19/share, translating to a staggering potential growth rate of 305.47% relative to the same quarter last year.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Backed by a leading industry group and robust history of earnings beats, it’s not difficult to see why this company is a compelling investment. Make sure to keep an eye on PBF as well as the energy sector as markets look to close out 2022 on a positive note.

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Energy Select Sector SPDR ETF (XLE): ETF Research Reports

PBF Energy Inc. (PBF) : Free Stock Analysis Report

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Zacks Investment Research