- Energy stocks have been the biggest winners in the stock market over the last year.
- IPaul Baiocchi of SS&C ALPS says that the rally can last another year or two.
- Baiocchi explains why it makes sense to be bullish on an area investors hated for a long time.
Energy stocks have been on a remarkable run in 2022 as one of the few parts of the market that are making investors money.
While nothing lasts forever, there are good reasons to think energy stocks still have plenty of bright days ahead of them, according to Paul Baiocchi. He’s the chief ETF strategist at SS&C ALPS Advisors, which manages $18 billion in assets and offers a slew of actively and passively-managed ETFs.
“The near term 12 to 24 month opportunity for energy is attractive,” Baiocchi told Insider in a recent interview. “So much of what’s happening globally, whether it’s geopolitically or economically on the domestic front, is so entwined with the energy story.”
The S&P 500’s energy sector is up about 60% so far this year, a remarkable result with the overall S&P 500 down nearly 20% year-to-date. That’s reflected in ALPS’ results as well: its actively-managed US oil fund is up almost 33% in 2022, while its passive master limited partnership ETF has gained almost 31% and its energy infrastructure ETF has climbed 19%.
With such a remarkable rally, investors have to be wondering if it’s time for what’s gone up to come down. But Baiocchi says that ongoing geopolitical currents and market fundamentals are still good for energy, free cash flow generation across the industry is strong, energy stocks are deleveraging, and energy companies will still profit even if inflation stays high.
“Energy is one of the only areas of the market where you see earnings revisions upward for 2023,” he said, while other sectors are seeing cuts. “Energy multiples or valuations are still lower than they have been historically.”
With all of that in mind, Baiocchi says there are a lot of reasons to buy into the sector, which is a small piece of most stock portfolios. But he also believes it’s still a good idea to keep the history of the energy industry in mind. “It has been the most volatile sector for the last 10 or 20 years, and was the worst performer in 2020 before being the best one in 2021-2022,” Baiocchi said.
Along with energy companies, he says that value stocks are better positioned than growth stocks in this higher-interest rate environment. That’s an increasingly popular view, and it’s very different from the investing approach that worked over the last-decade plus.
And if energy can continue to outperform, it would be a dramatic change considering how bearish investors were about energy companies just a few years ago.
As for the ongoing transition away from fossil fuels in favor of alternative energy sources, Baiocchi isn’t concerned. He says his firm’s clean energy strategy, which has big investments in Enphase Energy (ENPH), Rivian Automotive (RIVN), and First Solar (FSLR), is designed to profit as that shift plays out, but it won’t happen overnight.
“We’re still in the early innings of a lot of these applications at scale,” he said.