Mitch's Mailbox

July 21st, 2022

Should I Overweight Energy Stocks in My Portfolio?

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Bill C. from Slidell, LA asks Hello Mitch, given that the war is probably going to last beyond this year, and with gas prices seeming like they will keep going up, I was thinking about buying more oil and gas companies in my portfolio. What are your thoughts on that?

Mitch’s Response:

Thanks for writing. Oil and gas stocks in the Energy sector have indeed been performing well this year, and the Energy sector as a whole has been outperforming all other sectors in the S&P 500 as well as the broad index. Energy was up +31.8% (total return) in the first six months of 2022, while the S&P 500 index was down -20%.1 That’s a huge gap.

In terms of your question about adding more oil and gas names to your portfolio, I have a few points for you to consider before moving forward. The first is how much exposure you already have to energy stocks, and whether adding names would skew your portfolio to be heavily concentrated in oil and gas. The Energy sector comprises 4.4% of the S&P 500 index, which is a good frame of reference for how much energy should be in a market-neutral portfolio. Assuming you want to be overweight energy, 4.4% of total liquid assets should be your starting point.

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In this guide, you’ll get our viewpoint on the most important moves you can make to weather a bear market. This guide discusses some key tools to prepare for a bear market, including:

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The second point to take into consideration is that past performance does not predict future returns. So, just because Energy has had a stellar run over the last 6+ months relative to the broad market does not mean the outperformance will last indefinitely. Case in point: despite strong overall performance in the first half, Energy and commodities endured significant selling pressure in June, and Energy was the worst-performing sector for the month.

Natural gas prices, for instance, soared over 60% in April and May but plummeted in June to finish the quarter down -3.9%. Other raw materials suffered last month as well—wheat, corn, copper, and lumber prices all fell by double-digits, and oil fell sharply from early June highs. Supply and demand forces played a key role, but it also appears that markets were pricing-in a slower overall pace of global economic growth in the quarters ahead. If the global economy slows, demand for oil could soften from here just as U.S. producers are ramping up output.

A final factor to consider with regards to oil and gas stocks specifically is that the U.S. Energy Information Administration just released crude oil shortage data showing that inventories had actually climbed nicely earlier in July, which implies that new supplies are coming online at a faster-than-expected pace. We also know that Russian crude is still contributing to global supply, as they have found buyers in India and China. A combination of better-than-expected supply, moderating demand, and much of the war’s effect already being factored in to crude oil prices could mean waning enthusiasm for the Energy trade.

At the end of the day, having Energy exposure in an equity portfolio is crucial. But, I think it’s also important not to deviate too far from your benchmark’s weighting to the sector, so as not to introduce concentration risk in your portfolio.

An additional concern many investors are dealing with today is how to navigate this bear market. It’s important to remember that volatility is a natural (if unpleasant) part of the economic cycle. Instead of letting fear of a bear market manage your investment decisions, you can avoid the most harmful hazards of it by making use of some useful tools in our free guide, “The Zacks Bear Market Survival Kit.3 These tools include:

If you have $500,000 or more to invest, get our free guide today. You’ll get our viewpoint on the most important moves you can make to weather a bear market. Don’t wait—get this guide today!

Disclosure

1 Yahoo Finance, July 8, 2022. https://ca.finance.yahoo.com/news/energy-stocks-were-place-hide-164529729.html

2 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.


DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

Questions posed are for demonstrative and informational purposes only and may not reflect the views of current clients or any one individual.
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