BKR - Top Quant picks in Energy and Utilities as Q4 kicks off

2024-01-17 10:50:07 ET

The energy sector ( NYSEARCA: XLE ) ended the year with a whimper after clocking a 6% fall in the fourth quarter of 2023. The decline ate into its 11% rise in Q3, which incidentally was the only quarter of the year in which it notched gains.

Eurozone and China macro pressures coupled with low crude prices weighed on the energy companies’ stock in the first and second quarters of 2023, causing the index to fall 2% and 6.4% , respectively. In Q3, the index benefited from a 28.6% rise in prices, helped by factors such as the Russia-Ukraine war, rising interest rates, and curbs by OPEC+, among others.

Stocks making up the Energy index have secured an average health score of 3.48, the second highest behind Communication Services, according to the latest data from Seeking Alpha's Quant Rating System.

The system awards grades based on quantitative measures like valuation, earnings growth, and recent stock performance. The highest possible score for any individual company is a 5.

When looking at individual components, five out of the 23 companies that make up the index are considered "buy" or higher; the rest are rated "hold" as per Quant's recommendation, a stark contrast when compared to the 21 “buy” recommendations from Wall Street.

EOG Resources ( NYSE: EOG ) notched the top spot with a score of 4.58 out of 5 . The system indicated green for its profitability with an A+ grade, while performance, growth, and momentum for the stock have been rated a C, C+, and a C-, respectively. The company is set to report its fourth quarter earnings on February 23.

EQT ( NYSE: EQT ) secured the runner-up position with a score of 4.56 out of 5 , helped by profitability and growth grades, which are rated A and B. On October 25, the top U.S. natural gas producer reported a surprise Q3 profit as higher sales volumes offset lower gas prices.

Baker Hughes ( NASDAQ: BKR ) comes in third with 4.54 out of 5 . The Quant System displayed that the rig operator has favorable ratings for its growth and profitability grades. The company has beaten revenue and EPS estimates 4 out of 8 times in the last 2 years. Earnings are scheduled for January 25.

According to Goldman Sachs’ U.S. Weekly Kickstart report, energy companies are expected to have negative EPS growth of -28% in Q4.

Quant picks for Utilities

The same Goldman report predicts the utilities sector is expected to have the strongest year-over-year EPS growth at 47%, with a median stock EPS growth of 21% year-over-year.

The Utilities Select Sector SPDR Fund ( NYSEARCA: XLU ) saw a growth of 13.8% in the fourth quarter of 2023, which is a leap from the 5.4% growth for the same period in 2022.

The components of the Utility index had an average health score of 3.35, coming in fifth behind Communications, Energy, Financials, and Consumer Cyclicals, as per Quant’s tracking.

11 out of the 30 names in the index are rated "buy," 18 are rated "hold," and just one is rated “sell” by Quant, compared to Wall Street, which has given 24 names "buy" recommendations and the rest "hold.”.

Sempra ( NYSE: SRE ) comes in first with a score of 4.36 out of 5 . The stock is supported by its profitability, growth, and momentum ratings, which are all graded B. BMO recently upgraded the company to "Outperform" from "Market Perform" on expectations of 7% EPS growth from 2023 to 2026.

The AES Corporation ( NYSE: AES ) takes the second spot with a score of 4.18 out of 5. The stock has momentum and valuation grades of A- and B-. On November 25, the company reported mixed results, with a profit beat and a revenue miss.

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