By: Jon Costello
I want to continue a theme I have discussed recently: elevated stock market valuations are making it more difficult than usual to find attractive investments, even within the sectors and industries I know best.
I remain constructive on the longer-term outlook for oil, but many of the energy companies I would most like to own no longer look particularly cheap. Using roughly $80 per barrel WTI as a reasonable mid-cycle assumption, a number now trades around my estimate of intrinsic value.
That prompted me to look more broadly. Given how difficult it has become to find energy companies offering the margins of safety I am looking for, I expected Energy to have become relatively expensive compared with other parts of the market.
What I found surprised me. Energy was still the cheapest major S&P 500 sector on expected earnings and remained among the least expensive on other valuation measures. If a sector that no longer looks particularly cheap to me on normalized assumptions still ranks among the market’s cheapest, that says something about valuations elsewhere.
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