Beaten-down sectors provide opportunity
The S&P 500 Index is up about 10% so far this year, but the energy sector is off over 19%.1 Yet, my team believes conditions are ripe for a turnaround in energy.
- Exploration, production and service company valuations are near historic lows based on our analysis, trading at a price-to-book (P/B) multiple of 0.55. This compares with an average P/B of 0.88 for the sector using data all the way back to 1952.2
- Many energy companies are currently what we call “under-earners.” In good times, these firms can be cash-generating machines, but the long stretch of low energy prices has resulted in layoffs, dividend cuts, fewer stock buybacks and expense reductions. Once prices rebound a bit and stick, these companies should be even better positioned for growth, in our view.
- The sector is clearly out of favor and has been for some time. We believe investors are always wise to consider sentiment, but should then dig a little deeper and analyze the trends and facts.
- After the long period of underperformance, many funds (understandably) lightened up on energy shares and are now underweight.3 At some point, this trend will reverse, and demand for these shares should increase. Also, many investors have taken short positions in energy stocks, and they will have to buy shares in order to settle these positions.
- Last, energy company capital expenditures (CapEx) are at historically unsustainable levels relative to cash flow.
Read the full article at ETF Daily News right here: Energy Select Sector SPDR (ETF)(NYSE:XLE): Opportunity Awaits | ETF Daily News