Energy stocks are still underrated as the best equity investment right now amid soaring commodity prices and slowing supply, according to JPMorgan

  • Energy values remain the best equity investment as commodity prices continue to rise, JPMorgan said.
  • The bank forecasts rapid earnings growth and multiple revaluation driving energy stocks higher.
  • “Energy is the only sector that sees its quality, growth and momentum scores improve simultaneously,” JPMorgan said.

Despite massive gains in 2021 and year to date, there is still room for more upside in energy stocks, JP Morgan said in a note Thursday.

The bank said the energy sector remains its most confident investment because commodity prices continue to rise and underlying business fundamentals are improving. According to the bank, a combination of rapid earnings growth and major multiple revaluations will help boost the sector further.

“Energy is the only sector that is seeing its quality, growth and momentum scores improve simultaneously while maintaining an attractive value and revenue profile,” said JPMorgan’s Dubravko Lakos-Bujas, adding that estimates are cautious and underestimate the strong macroeconomic fundamentals going forward.

And while demand remains high for merchandise, supply could remain limited due to the rising cost of capital and pressure from ESG policies. “The supply-demand balance continues to tilt in favor of improving demand with higher commodity prices,” Lakos-Bujas said.

The bank estimates that demand for energy will exceed supply by 20% and that it would take $1.3 trillion in additional capital to close the gap by 2030.

“While investor interest and sentiment have clearly receded from last year’s record lows, energy stocks are far from a strong and sustainable outlook for fundamentals and shareholder returns. “, said Lakos-Bujas.

JPMorgan highlighted that energy remains the cheapest sector based on forward earnings and book value. This is after the sector grew 53% in 2021 and is up 38% year-to-date. The sector is trading at 9.5x forward earnings, well below its long-term average multiple of 16.5x.

“In our view, fundamentals and valuation make compelling arguments for the sector and we expect declines to be bought by broadening the investor base, including energy companies revamping share buybacks,” he said. concluded JPMorgan.

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