- Energy stocks remain the best equity investment as commodity prices continue to rise, JPMorgan said.
- The bank sees rapid earnings growth and a multiple re-rating driving energy stocks higher.
- "Energy is the only sector that is seeing its quality, growth, and momentum scores improve simultaneously," JPMorgan said.
Despite the massive gains in 2021 and year-to-date, there is still room for more upside in energy stocks, JPMorgan said in a note on Thursday.
The bank said that the energy sector remains its highest conviction investment as commodity prices continue to rise and the underlying fundamentals of companies improve. According to the bank, a combination of rapid earnings growth and re-ratings for key multiples will help drive further upside in the sector.
"Energy is the only sector that is seeing quality, growth, and momentum scores improve simultaneously while maintaining an attractive value and income profile," JPMorgan's Dubravko Lakos-Bujas said, adding that current estimates are conservative and understate the strong macro fundamentals going forward.
And while demand remains elevated for commodities, supply could stay constrained due to a rising cost of capital and pressure from ESG policies. "The supply-demand balance continues to be tilted in favor of improving demand with higher commodity prices," Lakos-Bujas said.
The bank estimates that energy demand will exceed supply by 20% and would require $1.3 trillion in incremental capital to close the gap by 2030.
"While investor interest and sentiment has clearly inflected from record lows over the past year, energy stocks are far from pricing in strong and sustainable outlooks for fundamentals and shareholder returns," Lakos-Bujas said.
JPMorgan highlighted that energy remains the cheapest sector based on forward earnings and book value. That's after the sector rallied 53% in 2021, and is up 38% year-to-date. The sector trades at 9.5x forward earnings, which is well below its long-term average multiple of 16.5x.
"In our view, fundamentals and valuation make a compelling case for the sector and we expect dips to be bought from broadening investor base including energy companies revamping share repurchases," JPMorgan concluded.