This is how swift the energy sector’s retrenchment has been: The Energy Select Sector SPDR (NYSEArca: XLE) was at one point earlier this year the top performer among the nine sector SPDR ETFs. Now, XLE is clinging to a barely positive year-to-date showing.
XLE, the largest energy ETF, was a star among sector ETFs, surging more than 25% after bottoming in February through the end of the second quarter. XLE, a benchmark among energy ETFs, not only delivered stout performance through the first and second quarters, it was also one of the top asset-gathering ETFs over that period and by far the inflows leader among sector ETFs. [Energy ETFs Keep Hauling in Cash]
Declining oil prices along with unprecedented strength in the U.S. dollar combined to send XLE lower by 11.5% for the three months ended Oct. 3, but the recent repudiation of energy stocks and ETFs has created a value proposition for a sector that soared earlier this year as value came into style over growth and momentum. [Sudden Problems for Beloved Sector ETFs]
“Earnings are forecast to grow about 10% next year despite flat revenues, but that requires an uptick in margins and consensus estimates have begun sliding along with oil prices. The Energy sector appears attractive in terms of valuation, trading at a discount to the S&P500 on most multiples, but long term we think the shale oil & gas revolution means larger supplies resulting in lower energy prices–great for consumers but a mixed bag for Energy firms,” said AltaVista Research in a recent research note.
The research firm has an overweight rating on the $9.67 billion XLE, an ETF that allocates a combined 28.7% of its weight to Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies.
ETFs rated overweight by AltaVista typically “consist of stocks trading at attractive valuations and/or having above-average fundamentals,” according to the research firm.
Due in part to the dollar’s strength and sliding oil prices, the recent trend in analysts’ full-year earnings estimates for the energy sector has been lower. Speculation of dividend reductions by some offshore drilling firms has been a drag on the energy sector as well, but it is worth noting the largest oil services providers have recently been impressive dividend growers. [Behind Oil Services ETFs’ Problems]
Additionally, XLE’s payout ratio of just 32.1% indicates many of the ETF’s 46 holdings are not burdened by their payout and have room for future dividend growth.
AltaVista’s P/E estimate for 2014 for the energy sector is 14.8 with a price-to-book ratio of 1.9. Those numbers are estimated to be 13.4 and 1.7 for 2015.
Energy Select Sector SPDR
