These energy stocks are expected by Wall Street to rise up to 37% over the next year

He pointed out that energy stocks make up a smaller percentage of the S&P 500 SPX, +1.06% than they did 20 years ago. Looking at numbers provided by FactSet, it appears Felder expressed this phenomenon mildly. As of the close on May 19, the S&P 500 energy sector made up 2.85% of the index’s market capitalization, down from 6.95% 20 years earlier.

Energy stocks for the rebound

Despite the inroads made by Tesla Inc. TSLA, +4.14% that will surely be expanded upon by traditional auto manufacturers gearing up to sell their own fleets of electric vehicles, the U.S. remains very much addicted to gasoline, diesel and other fossil fuels. So it is no surprise that with the economy bouncing back from the coronavirus doldrums of 2020, energy has been the best-performing sector this year.

The collapse in crude oil prices from the summer of 2014 through February 2016 was enough to push some energy companies out of the S&P 500 — their market values had declined too much to remain in the benchmark large-cap index. And the worst point of the COVID-19 crisis for financial markets even led to forward-month oil futures contracts falling below zero in April 2020. (The price of West Texas crude oil per continuous forward contract CL00, -1.93% was up 31% for 2021 to $63.35 on May 19, according to FactSet.)

The S&P 500 now includes only 23 energy stocks. Our look at the sector will be broadened to the 63 energy companies in the S&P Composite 1500 Index SP1500, +1.03%, which is made up of the S&P 500, the S&P 400 Mid Cap Index MID, +0.42% and the S&P Small Cap 600 Index SML, +0.31%.

Here’s how the 11 sectors of the S&P 1500 have performed this year through May 19 and also since the end of 2019 and since the end of 2015:

Energy leads this year, but it is one of only two sectors that are down since the end of 2019 and the only down since the end of 2015. (The above figures reflect only price changes — they exclude dividends.)

There are different ways to look at stock valuations. These include forward price-to-earnings ratios, which divide the current stock price by consensus estimates for earnings over the following 12 months. But this may not work very well for energy stocks, since the industry disruption has been so great that many of the companies are expected to continue losing money over the next year.

One can look at PEG ratios, which reflect forward price-to-earnings ratios and expected earnings growth rates, as we did here for Amazon.com Inc. AMZN, +0.49% and other large technology-oriented companies. But this approach won’t work well if the base for earnings growth is very low — compound annual growth rate estimates become distorted.

Instead, two lists follow — expected earnings growth for the largest companies and the companies favored the most by Wall Street analysts.

Expected earnings growth

The first shows the 20 largest energy companies in the S&P 1500 by market capitalization, with their consensus earnings estimates among analysts polled by FactSet for calendar 2021 and the following three years, if available. You may need to scroll the table to see all the data.

For Exxon Mobil Corp. XOM, -0.15% and Chevron Corp. CVX, +0.31% — the dominant U.S. integrated oil companies — the analysts expect earnings to rise considerably from 2021 through 2024. However, you can see that they expect only a slight improvement in EPS for Exxon in 2023 and a slight decline for Chevron that year.

Wall Street’s favorite energy stocks

Going back to the list of 63 energy stocks in the S&P 1500 Composite Index, here are the 20 covered by at least five analysts, with the highest percentage of “buy” or equivalent ratings among the analysts. The list includes dividend yields in the right-most column. Scroll the table to see all the columns.

The stocks on the second list with the highest 12-month upside potential of 37% implied by the consensus price target are Green Plains Inc. GPRE, -4.86% and Talos Energy Inc. TALO, +1.35%. The listed stock with the highest dividend yield is Williams Cos. WMB, +1.08%, with a yield of 6.30%, followed by Valero Energy Corp. VLO, -0.27%, with a yield of 5.07% and Phillips 66 PSX, -0.69%, with a yield of 4.20%.

Exxon didn’t make the second list because only 32% of analysts polled by FactSet rate the stock a “buy” or the equivalent. The company’s shares are up 43% this year and have a dividend yield of 5.90%. Chevron was also excluded from the second list, with 57% “buy” ratings. Chevron’s shares have risen 22% this year and have a dividend yield of 5.19%.

Wall Street’s tradition is to base its ratings in part on one-year price targets, but the energy-sector recovery may be a much longer-term story. One year can also be considered a short period for long-term investors. This underlines the need to do your own research to form your own opinion about any investment you are considering.

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