An Interesting Sector for Value Investors in 2015

by admin on January 7, 2015

2014 is over and the stock market did well for the third year in a row. The market was up 16% in 2012, 32.39% in 2013, and 13.69% in 2014 (including dividends). In other words the S&P 500 is up 62% since 2012. This is an impressive comeback after the -37% drop of 2008. Unfortunately, not every sector has enjoyed this upswing. The utilities sector did fairly well in general, up 19.09%, but other sectors such as Energy, Industrials, Materials and Consumer Cyclical underperformed the market in 2014. The energy sector was down -5.82%, materials -3.98%. Both industrials (+7.95%) and consumer cyclical (+3.38%) were up, but both underperformed the S&P 500 in 2014.

So the big question now is what to expect in 2015? Well, I believe the biggest opportunities remain in the sectors that underperformed in 2014. Some of the stocks in these sectors are very attractive at current valuations, and many of them were dumped in 2014 by individual and institutional investors for the wrong reasons.

I see some interesting opportunities especially in the energy sector, where many companies are being traded under book value. My position in Ecopetrol (EC) has a price to book value is 0.8, my position in Lukoil (LUKOY) is being traded at an even lower price to book value – 0.3. These stocks are down over the past three months (as are most other energy stocks) mainly because of the sudden drop in oil prices, which is putting enormous pressure on the entire sector as well as global economies.   

As the economy improves in the US, I expect the energy sector to recover as well. A growing economy demands more energy, and that can quickly turn things around. The other reason I believe that the energy sector has the potential to do well in 2015 is because the sector continues to deliver healthy dividends (as a consequence of the drop in stock prices). If the FED increases interest rates this year, the stock market will shake. Investors will likely reallocate some of their capital to fix income instruments and will look for protection by investing in utilities, healthcare, or energy companies that are currently paying generous dividends.

I strongly believe that very bad news will come from Venezuela this year, the economy is on the verge of collapse due to drop in oil prices. Venezuela owe China $50bn that the Chinese loaned them since 2006, and if oil prices remain low, the likelihood of repayment decreases exponentially. While this would likely have a major impact on the global economy, a cut in production in Venezuela due to social tension can immediately send oil prices back up.

Some consolidation may also occur in the energy sector in 2015 as smaller companies won’t be able to survive if oil prices continue to fall. An example of this consolidation occurred in the financial sector during the financial crisis of 2008 when Wells Fargo (WFC) acquired Wachovia, Bank of America (BAC) acquired Merrill Lynch, and JPMorgan Chase (JPM) acquired Bear Stearns. These acquisitions helped increase productivity, and reduce operational costs and marketing. A similar process can happen with this oil crisis, consolidation takes place when things are bad, and in the long term it can be very beneficial for the companies making the acquisition(s). It is just a matter of time until the energy sector stabilizes – making this sector a good opportunity for value investors looking for long-term investments.

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