20 Nov COTW: Buying Energy When it is Underrepresented
The chart below can be downloaded here.
Over the last 30 years the Energy sector’s weight in the S&P 500 (teal line) has ranged from 5% to over 15%, with the average around 9%. As of today, weak relative returns of the last several years have driven down that share to historic lows, which begs the question – is it time to buy Energy?
On the surface, the answer is “yes”. Forward 5-year relative returns of Energy vs. the S&P 500 (shaded grey area) have been positive – in some cases significantly so – when Energy has been underrepresented (see 2000 to 2004) and vice versa when Energy has been overrepresented (early 1990s, 2008 to 2012). While relative valuations may not be as compelling in this cycle & there are other risks, we think investors should view the space through a contrarian lens.
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