Wall Street has rarely been this bearish on energy stocks. The sector makes up its smallest percentage of the S&P 500 index in at least 40 years, at less than 5%. J.P. Morgan analyst Dubravko Lakos-Bujas calls the situation “extreme,” noting that “small-cap E&Ps [are] trading below book value and at price levels seen almost 25 years ago,” as “institutional investors have abandoned the sector.”

At the same time, insiders—sometimes called “the smart money”—and the companies themselves are loading up on the shares, a bullish sign.

“In contrast, corporate sentiment is bullish with insider purchases rising to cycle highs and shareholder return at about 6% with stronger buyback announcements and higher dividends,” Lakos-Bujas wrote.

“We believe favorable technicals, improving fundamentals with stabilizing business cycle, and ongoing geopolitical tensions in the Middle East could help redirect flows into this universally hated and cheap sector,” he wrote.

Oil investors have been particularly concerned about global demand, which is expected to stagnate next year as economies around the world slump. But J.P. Morgan is more bullish on the global economy, given low interest rates and other factors.

“With renewed synchronized global monetary easing and stimulus underway, liquidity conditions are starting to improve, which often leads to actual economic growth by about six months,” Lakos-Bujas wrote.

He’s also optimistic that “trade tensions should ease” with U.S. elections approaching.

Given all that, Lakos-Bujas recommends that investors buy energy stocks, and particularly explorers and producers. The note doesn’t mention specific names, but exchange-traded funds that play the industry include SPDR S&P Oil & Gas Exploration & Production (ticker: XOP) and iShares U.S. Oil & Gas Exploration & Production (IEO).


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