As concerns over high stock market valuations swirl and investors focus on AI companies, Berenberg strategists believe the energy sector is a relative bargain. The global energy sector is trading at record low valuations compared to the broader market, according to the German investment bank. “The U.S. and European energy sectors are currently trading at or near record low levels relative to the market across a range of valuation metrics,” Berenberg equity strategist Jonathan Stubbs said in a March 14 client note. “There is,” he said in a note to customers. Basically, energy trading at a relative valuation level has only been seen three times in the past 40 years: in the late 1980s, in 2000, and in 2020. The bank noted that investors in oil and gas stocks over these three periods outperformed the market by an average of 108% from depressed valuation levels, or more than twice their money. The bank used a proprietary metric based on a combination of price-to-earnings ratios, dividend yields and price-to-book multiples to determine sector ratings. He also noted that Europe’s oil and gas sector has become particularly cheap. “Europe’s energy sector has never been this cheap on price/book multiples, both in absolute and relative terms,” the bank said. Berenberg named five stocks as his “top picks” for investors looking to increase their exposure to energy: Shell, Total Energy, Harbor Energy, Saipem and Energian. All five stocks are dual-listed in the U.S. and trade over-the-counter or on exchanges. Berenberg also suggested that apart from valuation, fundamentals support owning energy stocks. Stubbs added: “Additional support from strong cash generation and a market-beating balance sheet should support total shareholder return.” He expects this cash generation to fund continued share buybacks, especially among larger companies. The bank also sees energy as a potential “geopolitical hedge” given the tightening of global oil supplies due to the Middle East conflict and the Russia-Ukraine war. “Tight energy markets are likely to support oil prices and help improve energy sector profitability,” Berenberg analysts said. “We see exposure to energy stocks as one potential way to hedge against geopolitical risk.”
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