Worried about lofty valuations? Berenberg names 5 top stocks in a 'cheap' sector

Published Mon, Mar 18 20247:09 PM EDT

As concerns swirl about lofty valuations in the stock market and investors focus on AI companies, strategists at Berenberg see one sector as a relative bargain: energy. The global energy sector is trading around record low valuations relative to the broader market, according to the German investment bank. "The US and European energy sectors now trade at, or near, all-time lows relative to the market across various valuation metrics," said Jonathan Stubbs, Berenberg's equity strategist, in a note to clients on Mar. 14. "On a global basis, energy trades at relative valuation levels only seen three times in the past 40 years: the late 1980s, 2000 and 2020." The bank pointed out that investors in oil and gas stocks on those three occasions outperformed the market by an average of 108% – or more than doubled their money – from the depressed valuation levels. The bank used a proprietary metric based on a combination of price-to-earnings multiples, dividend yields, and price-to-book multiples to determine the sector's valuation. It also noted that the European oil and gas sector, in particular, is discounted. "The European energy sector has never been this cheap on trailing price/book multiples, both on an absolute and relative basis," the bank said. For investors looking to increase their energy exposure, Berenberg named five stocks — Shell , TotalEnergies , Harbour Energy , Saipem , and Energean — as their "top picks." All five stocks are traded in the U.S. over the counter or on an exchange as dual-listed shares. Aside from valuations, Berenberg also suggested that fundamentals support owning energy stocks. "High levels of cash generation, alongside additional support from better-than-market balance sheets, should help underpin total shareholder returns," Stubbs added. He expects this cash generation to fund continued share buybacks, especially among larger companies. The bank also views energy as a potential "geopolitical hedge" given tight global oil supplies due to conflicts in the Middle East and the Russia-Ukraine war. "Tight energy markets are likely to underpin oil prices and support an improving earnings backdrop for the energy sector," the Berenberg analyst said. "We view exposure to energy equities as one potential way of hedging geopolitical risk."