The energy sector’s 2017 tale of despair is well-known. For example, the Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, is down nearly 14% year-to-date and the sector’s price action has recently little in the way of encouraging signs.
Some of the struggles of oil and the energy sector this year can be pinned on investors’ concerns regarding the ability of major oil-producing nations, including the Organization of Petroleum Exporting Countries (OPEC), to effectively reduce production. However, some sell side analysts are surprisingly bullish on the sector.
“Energy stocks will likely continue underperforming rising equities elsewhere in the market. Interestingly enough, the technology sector’s performance relative to the energy sector (on opposite ends of analysts’ buy rating spectrum) is currently breaking through 15-year resistance as technology continues to outperform,” reports CNBC, citing Oppenheimer’s head of technical analysis, Ari Wald.
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.
Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term. Some traders are not convinced and caution about betting on an energy sector rebound.
“Oil being low is just a symptom, to me, that energy may have a little bit of mean-reversion trade, but long term, faces massive secular risks. It’s just under assault from technology on every single level. And I think energy, in a lot of ways, is in a very disruptive phase right now,” said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, in an interview with CNBC.
For more information on the oil market, visit our oil category.