Energy stocks are back in favor for 2016 on Wall Street

While many investors have been wary of taking chances on the battered energy space, a sizeable minority of Wall Street strategists are betting on a pickup in oil prices next year and recommending energy stocks.

At least seven of 25 strategists in a recent Reuters poll cited energy as their contrarian pick for 2016 or said they expect an upside surprise from oil and energy in 2016.

The integrated oil companies should do best, these strategists said, with at least a couple of analysts – including Peter Cardillo of First Standard Financial – forecasting that oil would top $55 a barrel by the end of 2016.

“I’ve been doing this for 33 years and virtually any time I’ve seen anything as hated as energy is today … it tends to be a pretty good investment if you can hold it for six to 12 months,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.

The predictions come as oil prices trade near their lowest levels since 2008 and have been falling sharply since mid-2014. U.S. crude oil is now at about $37 a barrel, down more than 65 percent since July 2014. The S&P energy index .SPNY is down 21.7 percent for the year, the worst-performing of the 10 sectors by far.

Now is the time for investors with at least a one-year time horizon to buy into energy, said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York, and who also sees $55 oil next year.

“There’s an awful lot of bad news priced into energy and oil at the moment,” said Grohowski, who oversees about $194 billion in assets. “We would use this as more of an entry point than an exit point for areas like big oil and the oil services area.”

Grohowski likes integrated oil companies for their dividends and oil services companies for the deals and restructuring, though he declined to name specific companies. He said BNY Mellon Wealth Management has moved to a “modest overweight” in its sector exposure in some of its portfolios.

Phipps said energy is attractive because of the “extraordinary bearishness” surrounding oil and energy stocks. His firm in October added an 8 percent allocation to one of its portfolios through the Energy Select Sector exchange-traded fund (XLE.P). The fund is down 21.3 percent for the year.

To be sure, Phipps, Grohowski and others are in the minority. Most strategists polled by Reuters expect oil prices to remain a risk for stock investors next year and some cited energy among their least-favorite sectors.

However, Bryant Evans, a portfolio manager at Cozad Asset Management in Champaign, Illinois, thinks in 2016 pipeline and storage companies could be attractive investments. He said his firm has not added to positions yet, but holds stock in Kinder Morgan (KMI.N).

While U.S. energy earnings still are expected to be down in 2016 from the current year, the decline is not forecast to be nearly as steep as it has been.

S&P 500 energy sector earnings are forecast to fall 3.6 percent in 2016 compared with an estimated decline of 58.9 percent for the current year, according to Thomson Reuters data.

Source: Reuters