Energy Stocks May Have More Upside in the Tank | ETF Trends

As is being widely reported, the energy sector is back to the top spot among the S&P 500 sectors, and plenty of exchange traded funds are reflecting that lofty status.

The Invesco Dynamic Energy Exploration & Production ETF (PXE) is part of that group, performing, well, dynamically this year. Thanks to oil’s 2021 resurgence, PXE has nearly doubled. While that may imply that upside from here is limited, the opposite may be true as some Wall Street experts are wagering that oil prices could soon eclipse $100 per barrel or even go higher than that.

What’s interesting about the state of the old guard energy industry today is the split between oil prices and the energy sector’s respective price actions. For example, Brent crude prices, the global benchmark, have returned to and surpassed their pre-coronavirus pandemic highs. However, the S&P 500 Energy Index still needs to gain a few percentage points to reclaim its pre-pandemic highs. As energy stocks continue grinding their way back to 2019 levels, PXE should benefit.

“We expect the sector to re-rate as companies deliver strong results, raise guidance, and reiterate their focus on shareholder capital return rather than unprofitable market share gains,” said JPMorgan strategist Dubravko Lakos-Bujas in a note to clients.

PXE, which tracks the Dynamic Energy Exploration & Production Intellidex Index, is highly levered to the trend of rising oil prices because many of its 30 holdings are exploration and production firms — a segment of the energy sector that historically has tight correlations to oil prices in either direction. Additionally, many PXE member firms are also natural gas producers, and that’s a relevant point because “natty” is one of this year’s best-performing commodities.

Those aren’t the only reasons that PXE could offer more upside, and investors don’t have to pay up to get involved with the fund.

“In a world where most assets have broadly re-rated due to lower rates and liquidity, energy still offers non-linear earnings growth potential for several years at an attractive valuation,” adds Lakos-Bujas.

PXE separates itself from the cap-weighted energy ETF pack by focusing on factors such as price momentum, earnings momentum, quality, management action, and value. That methodology puts size on PXE’s side. The average market value of its holdings is less than $20 billion, meaning that it’s not being restrained by some lumbering large-cap oil stocks that are less responsive to crude prices.

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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.