It is not unreasonable to think that when a sector lags other groups and the broader market that its valuations may start to become appealing. However, that is not the case in the energy patch this year. Energy, the seventh-largest sector weight in the S&P 500, is the worst-performing sector in the U.S. this year and it is also expensive.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, is down 10.1% year-to-date. Energy’s earnings drag is evaporating as S&P 500 energy earnings are expected to be only slightly negative for the fourth quarter and offer significant upside potential moving forward in 2017. XLE currently resides near its lowest levels since prior to the U.S. presidential election in November.
However, investors will not find attractive valuations on lagging energy stocks. At least not at the moment.
“At nearly 28 times forward earnings, the sector’s forward price-earnings ratio is significantly above the second most richly priced sector, consumer discretionary. Its trailing price-to-earnings ratio is 33 times, second only to real estate among the 11 sectors,” reports CNBC.
Valuation concerns for the energy sector come even as the sector is featured prominently in an array of value ETFs. However, the sector looks more like a value trap than a legitimate value play over the near-term.