The energy industry and sector-related exchange traded funds have fallen off as oil prices plunged. However, despite the short-term volatility, investors may find that the energy sector remains an attractive long-term play.
Over the past year, the Energy Select Sector SPDR (NYSEArca: XLE) decreased 26.0%, Vanguard Energy ETF (NYSEArca: VDE) decline 27.9% and iShares U.S. Energy ETF (NYSEArca: IYE) dropped 27.0%.
The energy sector has been dragged down after oil prices plummeted about 60% in the past year, with West Texas Intermediate crude oil futures now trading around $42.1 per barrel, compared to prices above $100 last year.
Nevertheless, Adam Parker, Chief U.S. Equity Strategist for Morgan Stanley, said that energy stocks remain one of the firm’s top recommendations, reports Julie Verhage for Bloomberg. [Yes, Contrarians Love Energy ETFs]
Supporting the energy sector outlook, Parker argues that the sector has historically reversed after “extreme downward movements,” like what is going on right now.
Moreover, Parker points out that energy stocks typically hit a trough two months before revisions do. Analysts will continue to downwardly revise earnings for an additional two months after the sector bottomed, so we might already be in a bottom while market observers project further pain for the companies.
Valuations are also sitting at relatively attractive levels as well. Looking at the energy sector’s price-to-book ratio since 1990, the sector’s valuations are hovering near lows last seen during the financial downturn.