Does Value Investing Work in the Energy Sector?

By: John Alberg and Michael Seckler

With the recent drop in oil prices, many energy companies' shares have become less expensive.  We explored whether buying the most discounted energy companies might have been fruitful in the past and also sought to identify the value factor that has been most effective for this sector.  

Please review the simulated results below, which show the annualized performance by decade of four simple value-oriented approaches for selecting investments in the energy sector.  The results suggest that value investing works with energy companies.  And, for this industry sector, price-to-sales is the most effective factor whereas price-to-book is the least effective.


* Simulation Assumptions 

In the simulations, Standard & Poor’s COMPUSTAT database was used as a source for all information about companies and securities for the entire simulated time period.  The S&P 500 return is the total return of the S&P 500, which refers to the Standard & Poor's 500 Index with dividends reinvested.  Simulated returns also include the reinvestment of all income.  In each simulation, NYSE, AMEX, and NASDAQ companies that have a GICS sector code of 10 (Energy) were ranked according the stated criteria such as Market Value to Book Value.  Non-US-based companies and companies with a market capitalization that, when adjusted by the S&P500 Index Price to January 2010, is less than $400M were excluded from the ranking.

The simulation results reflect assets-under-management (AUM) at the start of each month that, when adjusted by the S&P500 Index Price to January 2010, is equal to $10M. Portfolios were constructed by investing equal amounts of capital in the top decile of companies represented by each value factor and then rebalancing monthly to equally weight the evolving constituents of the top decile.  The amount of shares of a security bought or sold in a month was limited to no more than 10% of the monthly volume for a security.  During the period 1983 to present, the purchase and sale price of a security was based on volume weighted daily closing price of the security during the first ten trading days of each month. Prior to 1983, when daily pricing is not available for all securities, the purchase and sale price of a security was based on the monthly closing price of the security.

Transaction costs are factored as $0.02 per share plus an additional slippage factor that increases as a square of the simulation’s volume participation in a security.  Specifically, if participating at the maximum 10% of monthly volume, the simulation buys at 1% more than the average market price or, conversely, sells at 1% less than the average market price.  Other than these transaction costs, the simulated results do not reflect the deduction of any management fees or expenses. Historical simulated results presented herein are for illustrative purposes only and are not based on actual performance results. Historical simulated results are not indicative of future performance.