“Profit expectations have fallen dramatically–though the pace slowed recently–which in turn has pushed the sector’s P/E ratio much 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 Research in a new note.
The research firm rates XLE neutral, which “indicates that valuations adequately reflect the fundamentals of stocks” in the ETF.
Notably, AltaVista does not view XLE as a bargain on valuation. The research firm estimates the ETF’s 2015 price-to-earnings ratio to be 33.8 before falling to 23.9 next year. That is well above AltaVista’s estimated 2015 P/E for the S&P 500 of 17.5.
Investors have added $1.45 billion to XLE since the start of the second quarter.
Energy Select Sector SPDR
