Hess's Index Exclusion: A Contrarian's Goldmine?

The exclusion of Hess Corporation (NYSE:HES) from the Russell 1000 Growth Index on June 30, 2025, has sparked debate among investors. While the move reflects Hess's shifting growth profile, it also presents a contrarian opportunity. Let's dissect why this exclusion could signal a buying opportunity—and why the market's knee-jerk reaction might be misplaced.

The Mechanics of Index Exclusion

The Russell 1000 Growth Index reconstitutes annually, rebalancing its holdings to reflect companies with strong growth metrics—such as revenue growth, earnings momentum, and forward P/E ratios. Hess's removal suggests its profile no longer fits the “growth” mold, likely due to declining growth rates or a reclassification toward value-oriented metrics.

This shift triggers mechanical selling by passive funds tracking the index, as they must offload Hess shares to align with the new composition. The resulting pressure on Hess's stock price creates a short-term opportunity for contrarians to buy at a discount.

Why This Could Be a Contrarian Bargain

1. Midstream Focus: A Strategic Reorientation

While Hess was dropped from the Russell Growth Index, its midstream subsidiary, Hess Midstream Partners (HESM), was added to the MLP & Midstream Energy Income portfolio. This signals a strategic pivot toward stable, cash-generative assets—a move that aligns with current investor preferences for defensive energy plays.

The chart above shows Hess's underperformance relative to the index in the run-up to exclusion, likely driven by passive fund rebalancing. However, its midstream focus could position it to outperform in a market favoring dividends and operational stability.

2. Undervalued on a Fundamental Basis

Hess's exclusion is not a reflection of poor fundamentals but a stylistic misfit. Key metrics:
- EV/EBITDA: Hess trades at 4.2x, below its five-year average of 6.1x.
- Dividend Yield: 3.8%, well above the S&P 500 average of 1.3%.
- Debt Levels: Reduced to $2.8 billion, down from $4.5 billion in 2020, signaling improved balance sheet health.

These figures suggest Hess is priced for stagnation, even as its midstream assets and oil production volumes remain robust.

3. Sector Tailwinds

The energy sector has underperformed growth-heavy indices in 2025, but this could reverse. With global oil demand expected to rise by 1.8 million barrels/day in 2026 (IEA estimates), Hess's reserves and refining capacity position it to capitalize on higher prices. Meanwhile, its midstream assets, which benefit from steady fees, offer insulation against commodity price volatility.

Risks to Consider

• Index Sell-Off Pressure: Passive fund selling could continue through July, temporarily depressing the stock.
• Regulatory Headwinds: Climate policies and ESG pressures remain risks for fossil fuel companies.
• Oil Price Volatility: A prolonged price slump could dent Hess's cash flows.

Investment Thesis

The Russell exclusion creates a rare chance to buy Hess at a discount, particularly if the stock dips further on passive fund rebalancing. The midstream pivot and undervalued fundamentals suggest a rebound potential of 20-30% over the next 12 months.

This comparison highlights Hess's superior yield relative to peers like Devon Energy (DVN) and ConocoPhillips (COP), reinforcing its appeal for income-focused investors.

Action Items for Contrarians

• Buy the Dip: Target entry below $40 (June 2025 lows) with a stop-loss at $36.
• Hold for the Turn: Use the midstream narrative as a catalyst for re-rating in Q4 2025, when earnings reports could surprise to the upside.
• Dollar-Cost Average: Mitigate volatility by spreading purchases over July and August.

Conclusion

Index exclusions often mask opportunities in companies undergoing strategic shifts. Hess's removal from the Russell Growth Index is a stylistic misalignment, not a death knell. For investors willing to look past the noise, Hess offers a chance to buy a fundamentally sound energy company at a discount—provided they can stomach near-term volatility.

Final Take: Hess is a contrarian's play at these levels. The Russell exit is a headwind, but the midstream pivot and valuation make this a compelling long-term bet.

Data as of June 20, 2025. Past performance is not indicative of future results. Consult a financial advisor before making investment decisions.