Monday, January 01, 2007

We're Number 2! We're Number 2!

Can anyone believe that the energy sector actually finished the year okay, given what a volatile year we had? Oil prices finished the year close to unchanged, and most of the gains in energy stocks came towards the end of the year, but what the heck, we'll take it.

Sam Stovall, chief investment strategist of Standard & Poor's, recaps a couple of historical tendencies that suggest 2007 could be a positive year for the stock market overall in this interview with Bloomberg News. He discusses the energy sector, which ended the year as the number 2 performing sector in the S&P500 with a 22% return and is the cheapest sector in the S&P500 with a 9.7 forward price to earnings ratio (ie. based on analyst's predicted 2007 earnings). S&P predicts a gradually rising trend for oil in 2007, with an average crude oil price of $64.50 and price toward the end of the year of $66. Mr. Stovall makes the observation that they hope energy will remain a "page 3 story" instead of a "page 1 story" in 2007.

Bloomberg News: Sam Stovall of Standard & Poor's.


To explain the year in further detail:

The 22% comes mainly from the integrated oil majors (which I define as: XOM, COP, CVX, MRO, OXY) and select oil service names. The majors, because they have exposure to most or all parts of the oil supply chain (production, refining, distribution, marketing), are seen as better plays as oil prices fall or moderate because they can usually pick up profits somewhere along the chain. Other sectors, for example coal, natural gas, refiners, E&Ps, all did less well this year, a number with outright losses. If you own energy mutual funds, you may notice yours was above or below the 22% return, depending on where your manager overweighted or underweighted. The Vanguard Energy fund, which I use as proxy for the average energy fund, returned 21.21%.