“Extremely Disconnected” Energy Stocks Face Explosive Short Squeeze: JPM
As we reported earlier, JPM made a forceful statement against the recent market dump by hiking its S&P price target for various reasons, the chief of which was that a the coming tide of stock buybacks will lift all boats, with an emphasis on Consumer Recovery, Domestic Recovery and International Recovery stocks. It’s also why JPM raised both its year-end EPS estimate by an additional $5 to $205, as well as its year-end SPX price target of 4,400 to 4,600.
And while JPMorgan’s chief equity strategist Dubravko Lakos-Bujas was bullish on everything from Consumer Discretionary (i.e. Retail,
Travel & Leisure), to Semis and Banks, there was one sector which he felt was poised was most likely to move sharply higher over the near-term. Energy.
There are two reasons behind his energy exuberance: the first is that as JPM discussed a few weeks ago, large-cap Energy is now trading at a ~10% FCF yield and a >8% FCF/EV yield at $70 Brent in 2022, with leverage that is <1x. These are extremely cheap numbers relative to recent history and indicate that the market is trading as if investors expect oil prices to plunge in the near future (something which the strip does not show).
Second, and much more relevant, is Dubrakvo’s claim that the energy sector has “increasing potential for a sharp short squeeze and move higher, given its extreme disconnect from oil fundamentals” which as shown in the chart below is the widest in more than 30 years…
… while the divergence between oil and energy stocks is such that energy names would need to gain approximately 40% from here to catch up to oil.