Energy Stocks Too Costly at Current Oil Prices for Deutsche Bank

  • Strategist Bianco sees shares reflecting $65-70 crude price
  • `More red ahead' predicted after about two years of losses

Energy stocks are “substantially overvalued” even after suffering this year’s biggest losses in the Standard & Poor’s 500 Index, according to David Bianco, Deutsche Bank AG’s chief U.S. equity strategist.

The chart below highlights an indicator Bianco used to reach his conclusion, presented in a report two days ago. The New York-based strategist cited the S&P 500 Energy Index’s forward price-earnings ratio, or its value relative to projected profit for the next 12 months.

Energy is the most expensive of the S&P 500’s 10 main industry groups by this valuation gauge. This month’s forward P/Es have been as high as 30.4, about twice the average since the current bull market got started in March 2009, according to data compiled by Bloomberg.

The ratio suggests that investors see oil prices averaging $65 to $70 a barrel in 2016, Bianco wrote. Crude averaged about $50 a barrel this year in New York trading through yesterday, and next year’s median forecast in a Bloomberg survey is $55.

All this translates into “more red ahead for energy,” he wrote. The S&P 500 Energy Index ended yesterday’s trading with a 16 percent loss for this year after a drop of 10 percent last year. The index is headed for only its second back-to-back annual declines since calculations started in 1989. The first occurred in 2001-2002, when stocks were in a bear market.

Energy is one of four areas where Bianco’s recommended weighting is lower than its share of the S&P 500 would indicate. The others are raw-material producers, industrial companies and makers of food beverages, and other consumer staples.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE