Energy stocks and the related exchange traded funds are getting drubbed this year. For example, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is lower by about 7% to start 2017.
The laggard status from energy, the S&P 500’s seventh-largest sector weight, could be a sign for investors to take a closer look at the group and ETFs such as XLE.
Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
Some analysts believe the energy sector’s growth prospects remain attractive following the dip to start 2017.
“Evercore ISI’s Dennis DeBusschere upgraded energy on Friday. The underperformance of Energy, even in the context of the recent pullback in oil prices, has left an unusually strong divergence between the stocks and their underlying commodity,” notes Evercore according to a post by Crystal Kim of Barron’s.
Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
Crude oil prices continued to weaken on speculation of a revival in U.S. shale production that has undermined the support from production cuts out of OPEC and other major exporters. OPEC and Russia have in all cut at least 1.1 million barrels per day in production so far.
Rebounding earnings are supportive of a more optimistic dividend outlook for the energy sector. Some analysts expect the energy sector will become a positive contributor to earnings growth for the S&P 500 by the first quarter of 2017 due to a combination of higher expected oil prices and easier comparisons to weak earnings in 2016.
“Evercore is moving to an Overweight exposure to the sector from the Market Weight position it has held since July. They expect to hold this recommendation for the next three-to-six months as global indicators and economic activity firms up, “paving the way for a re-acceleration of the cyclical/ risk-on rotation” that started in the middle of last year, says DeBusschere,” reports Barron’s.
For more information on the energy sector, visit our energy category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.