Winners and Losers

by Shawn Narancich, CFA
Executive Vice President of Research

More than Meets the Eye

Buoyed by the best quarterly earnings growth in six years, blue chip equities are forging new highs, with investors disregarding the turmoil in Washington and discounting increasingly lofty expectations for the remainder of 2017. Peeling back the onion, we observe a technology-driven market in which the S&P 500’s largest sector has now outperformed the worst – energy – by 32 percentage points so far this year. This is a narrow, FANG-stock led market in which growth is substantially outperforming value. The trials and tribulations of oil have weighed heavily on the energy contingent of the latter, and this week’s OPEC meeting did nothing to stem the performance deficit. 

Black Gold?

Investors are skeptical that OPEC’s production cuts can overcome a resurgence in U.S. tight oil production, thwarting the cartel’s goal of eliminating excess inventories. We have a more bullish take on oil markets at a time both cyclically and seasonally that points to higher prices to come. Compliance with the OPEC-engineered production cuts is high, and we are finally seeing the long-awaited payoff in inventories -- despite what is commonly portrayed in the press, crude oil and product inventories are beginning to decline despite U.S. production gains. Seasonal demand for gasoline and diesel is picking up, and year-over-year global demand growth is stalwart. While many see a stand-off between OPEC and U.S. shale, the other half of global oil supply is stagnant, and prone to future decline following hundreds of billions of dollars of foregone investment over the past three years. 

Buy the Rumor, Sell the News

Antipathy toward energy is rampant, and yesterday’s oil trade displayed telltale signs of not only a lack of long-only interest, but hedge fund activity as well. Into yesterday’s confab, oil had rallied 15 percent against increasing industry chatter that the 1.8 million barrels/day output cuts would be extended by the cartel and its non-OPEC partners. After the consensus view of yesterday’s meeting was delivered, oil and energy stocks opened largely flat. But selling intensified as the day progressed, emboldening a bet against the space that so far this year has been a money-making endeavor. For our part, we remain in the bullish camp, expecting oil prices and related equities to rise as the oil market tightens.

Return of the Jedi

While Amazon’s e-commerce success has been well-documented, short sellers betting against Best Buy were reminded yesterday that not all business models ultimately succumb to the Bezos behemoth. Contrary to expectations for negative same-store sales, Best Buy delivered sales growth in its fiscal first quarter and reported better than expected profits. Best Buy shares surged 21 percent on the news. Chalk one up for a bricks-and-mortar stalwart that has transitioned its business into something more than just a showroom for Amazon.

Takeaways for the Week:

  • Record highs on the S&P 500 reflect a tech-driven market benefiting from surprisingly strong earnings
  • Energy remains this year’s worst performing sector despite improvement in the oil market’s underlying fundamentals