Bank of America believes that rising oil prices will drive major outperformance among Energy Sector stocks in the next year. In a report out Tuesday, analyst Savita Subramanian explains why Bank of America upgraded energy stocks to Overweight.
According to Subramanian, the bullish energy thesis revolves around a sharp recovery in WTI crude oil prices to $54/bbl by the end of 2016 and $69/bbl by June 2017. With WTI trading at around $46/bbl on Wednesday, Bank of America’s price target represents roughly 50 percent upside for oil within the next year.
“Historically, when oil has rallied over 25%, Energy has outperformed the market nearly 90% of the time, with average outperformance of 11ppt,” Subramanian writes.
Subramanian adds that Energy’s underperformance during the bull market since 2009 has pushed its weighting in the S&P 500 below 7 percent. There has never been a time in history when Energy’s S&P 500 weighting has been this low and the sector didn’t outperform the market in the three years that followed.
While Energy Sector stocks currently trade at a lofty 40x forward PE ratio, Subramanian believes a wave of upward earnings revisions is already underway. In fact, the Energy Sector saw…
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