While our average investment portfolio has seen a decline in market value over the past several months, we continue to believe that the equities we own across our various investment strategies hold good values in an overall market environment that we do not see as cheap. Our research indicates that the energy sector and related securities are the most undervalued sector and sub-industries, not only in absolute terms, but also relative to other sectors. It is for this reason that we maintain our over-weight position in energy.
We are not alone in this line of thinking. As shown in the chart below, according to analyst forecasts compiled by Bloomberg, price targets for companies listed in the S&P 500 index envision a 24 percent rise for energy shares in the next 12 months. That’s more than double the estimated 10 percent advance for financial firms and the forecasted 9 percent gain for the consumer discretionary sector that includes everything from apparel to automobiles. With that said, as part of our diversification, we do hold sizeable amounts of our portfolios in the financial, consumer, and materials sectors, which, as you can see on Chart 1, are suggested to be some of the higher performing sectors over the next 12 months.
Chart 2 drills down into the sub-industries within the S&P 500 energy sector. Here we can see the analyst forecasts compiled by Bloomberg are most bullish about exploration companies, followed closely by drilling specialists and equipment suppliers. Oil refiners and service providers that do everything from fracking to pouring cement around the edges of new wells are at the low end of expectations. That being said, even these service companies, the energy sub-industry with the lowest 12-month return expectations (roughly 15%), are still higher than the other 10 primary sectors that make-up the S&P 500 Index (See Chart 1).
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