West Texas Intermediate futures surged nearly 6% Wednesday, extending a bullish run for the benchmark U.S. oil contract that has encouraged some traders to ratchet up long oil positons.
“Money managers boosted their net-long position on West Texas Intermediate by 16,855 contracts to 132,857 futures and options in the week ending Sept. 8, according to data from the Commodity Futures Trading Commission. Traders also boosted their bullish stance on Brent crude by the most since April,” reports Dan Murtaugh for Bloomberg.
Oil’s stout performance yesterday translated to an almost 3% gain for the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF by assets.
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.
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.
“Regardless of an interest rate hike or not, investors looking to own an energy ETF should be prospecting XLE. Again, post-Brent $39 capitulation, XLE should be throwing off a higher yield, it should be pricing at generational lows, and the underlying holdings that comprise the top 10 tickers by concentration (comprising 60% of the ETF’s valuation) will not be at risk of any structural failure. That juxtaposition of pricing to structural integrity should be arbitraged. Usually, and I believe this to be the case with XLE in this instance as well, capitulation offers deep value that isn’t found but at the farthest ends of the sentiment spectrum,” according to a Seeking Alpha post.
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.
Investors appear to be warming to the idea of embracing energy ETFs again as highlighted by XLE’s third-quarter inflows of over $393 million.
Energy Select Sector SPDR
