- The fear of missing out is likely starting to pick up for investors who have little exposure to energy stocks, according to Fundstrat’s Tom Lee.
- The energy sector is up 32% year-to-date, but with such a low weighting in the S&P 500, investors have little exposure to the sector.
- Lee said one oil ETF could surge 278% if the price of oil makes its way to $80 per barrel.
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The surge in energy stocks so far this year is likely creating “FOMO” for investors who have little exposure to the sector, Fundstrat’s Tom Lee said in a note on Wednesday.
Lee points out that the S&P 500 energy sector has soared 32% year-to-date, making it the best performing sector by a longshot this year. The next best performing sector is financials, with a return of 14%.
But investors have little exposure to the energy sector. According to Lee, the S&P 500 weighting to energy stocks is about 2%. That dynamic “potentially creates performance issues for those underweight energy,” Lee said.
Energy is a “misunderstood” sector, according to Lee. Warren Buffett’s right-hand man, Charlie Munger, probably agrees, who said on Wednesday that he does not foresee a long-term demise in the oil industry.
To gain exposure to the energy sector, Lee recommended investors buy the VanEck Vectors Oil ETF, which is “ridiculously cheap” relative to current oil prices.
“There is a comparative price gap between oil at $60 and where energy equities trade,” Lee explained.
Based on an analysis of the price relationship between oil and energy stocks since 2009, Lee estimates that the Oil ETF could surge to $530 with oil prices at their current level of $60 per barrel, which represents upside potential of 178% from Tuesday’s close.
And if oil prices continue their upward trend to $80 per barrel, Lee estimates the Oil ETF could trade to $720, representing potential upside of 278% from Tuesday’s close.
“I recommend at least taking a small market-weight position, but obviously, since energy is one of our top 3 sectors for 2021, we recommend a much larger overweight,” Lee said.
The VanEck Vectors Oil ETF traded up 6% in Wednesday trades.