The Energy Select Sector SPDR (NYSEArca: XLE) is the worst performer among the nine sector SPDR exchange traded funds this year with a loss of about 24 percent. Ongoing struggles for XLE and rival energy ETFs are prompting some market observers to wave the white flag when it comes to forecasting what’s next in the energy patch.
Some institutional investors are steering clear of energy stocks, but at least one exchange traded funds strategist is embracing beaten-up energy sector ETFs. However, that could portend opportunity with XLE.
Profit expectations have fallen dramatically which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined, though P/Es have come off their highs and estimates appear to have stabilized,” according to AltaVista.
Bullish on the energy sector early this year, “Morgan Stanley downgraded the sector to market weight, indicating the supply glut in oil may not improve for another year, at a minimum, and that investors will likely find a better entry point in six to nine months,” reports Luke Kawa for Bloomberg.
Investors need to identify the sector’s strongest names, which are likely also its biggest members. The larger integrated oil companies are more flush and have a larger war chest to draw upon when times get tough. While big oil has cut stock repurchase plans to save cash, many bigger players have not gone so far as to cut back on dividends. For instance, Exxon and Chevron have historically exhibited a long standing of steadily increasing dividends and remain so-called dividend aristocrats. [Oil ETF Dividends Appear Safe…Sort Of]
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.
Morgan Stanley says investors can find more attractive entry points in the energy sector several months out, indicating that there is no need to bottom-fish at current levels.
Should energy sector ETFs see more waning momentum, which is exactly was seen Tuesday, the UltraShort Oil & Gas ProShares (NYSEArca: DUG) and the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) could prove to be winning trades. ERY attempts to deliver three times the daily inverse performance of XLE’s underlying index while DUG is a double-leveraged inverse play on the Dow Jones U.S. Oil & Gas Index.
Energy Select Sector SPDR
