With another solid showing on strong volume Tuesday, the Energy Select Sector SPDR (NYSEArca: XLE), has climbed more than 4% over the past week, bring its year-to-date to just over 1%.
That is not enough to erase the memory of XLE’s 2014 futility when it was the only one of the nine sector SPDR ETFs to close the year with a loss, but this could be the time when bold calls on beaten energy stocks are rewarded. That includes an overweight rating on XLE from AltaVista Research.
AltaVista’s overweight rating implies above average appreciation potential. “Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” according to the research firm.
AltaVista has recently been consistent on XLE, initially revealing the overweight rating on the ETF two months ago, stating at the time “Profit expectations have been deteriorating rapidly as oil prices have fallen, and OPEC’s recent decision to maintain production levels is confirmation that larger supplies from America’s shale oil & gas revolution means lower energy prices–great for consumers but a threat to the long-term profitability of Energy firms. The Energy sector appears attractive in terms of valuation, but momentum isn’t currently in the sector’s favor.” [A Gutsy Call on an Energy ETF]
As a new normal for the energy sector potentially comes to pass, AltaVista sees opportunity with XLE, the largest equity-based energy ETF.
“Profit expectations have fallen dramatically, which in turn has pushed the sector’s P/E ratio higher even as stock prices have declined. Obviously momentum isn’t in the Energy sector’s favor, but stocks appear attractive in terms of valuation if–and this is a big if–the depressed profitability (Return on Equity) forecast for this year and next is temporary, rather than a ‘new normal’ reflecting abundant new supplies from shale,” said AltaVista in a new research note.
Although likely coincidental, the reiteration of that bullish call on XLE comes at an interesting time because February marks the beginning of the energy sector’s most favorable seasonal trends. Dating back to 1999, the first full year of trading for the sector SPDR ETFs, XLE is usually the top performer in the second month of the year with an average February gain of almost 2%. [Sector ETF Ideas for February]
Energy Select Sector SPDR
