Per the latest Earnings Trends, 96.8% of total energy companies that have reported results for the quarter have witnessed 107% year-over-year earnings growth on 21% rise in revenues. The earnings growth rate seems impressive in comparison to other sectors. Earnings and revenue beat ratios are 83.7% and 76.7%, respectively (read: Energy ETFs to Surge After Exxon, Chevron Strong Q3 Results).
Per Blackrock, energy stocks are trading at 50% discount to the broader market on the basis of price-to-book ratio — marking the largest discount since 1995. While the S&P 500 is trading at a forward price earnings ratio of 15.6, the energy sector is trading cheaply at 13.7. The sector has saw massive decline in pricing as it was trading near 25.7 times at the start of the year. Currently, the stocks are trading at the cheapest valuations since 2016.
The price movements in energy stocks are closely correlated to the oil price. As a consequence, the prices have gone through some wild up and downs. The oil and gas sector lost nearly $1 trillion in value in the 40-day period starting in early October, which continued into last week (ended Nov 16). This period saw oil prices fall for 12 consecutive days in a row and included a worst single-day drop in three years. Energy equities included on the S&P 500 lost $240 billion in value, while Exxon Mobil Corp (XOM - Free Report) lost $35 billion in this 40-day period.
Energy Select Sector SPDR Fund (XLE - Free Report) is down by 5.1% year to date. The fall could be attributed to Exxon Mobil Corp and Chevron Corp (CVX - Free Report) , the two largest U.S. oil companies which occupy nearly 42% weight. Recently, West Texas Intermediate futures notched their worst losing streak in 34 years. Seeing the decline in prices lately, this might be an opportune time to tap into energy equities.
The energy sector has slumped 12% in the fourth quarter, majorly due to oil entering the bear market. However, it has recovered a bit this month and is down nearly 0.5% (as of Nov 19). Per Sam Stovall, chief investment strategist at financial research company CFR, the sector performs better in the rising rate and inflation scenario. Per CFRA, the energy sector has been a better performing sector since World War 2 in comparison to consumer staples, healthcare and utilities (read: Fed Meet Signals December Rate Hike: ETFs That Gained).
However, strengthening of the greenback could pose a threat to the sector. If the U.S. dollar rallies, it will make buying dollar-denominated oil expensive in foreign currencies. The greenback is likely to surge in the days ahead due to political and economic turbulence in Europe. Euro has already shed nearly 5% against the greenback this year (read: Is the Uptrend in Dollar ETFs Over?).
Given cheap valuations and strong earnings growth, investors could tap into the following popular energy ETFs (see: all the Energy ETFs here):
The fund tracks the Energy Select Sector Index and comprises 29 holdings. The fund’s AUM is $16.5 billion and expense ratio is 0.13%. It carries a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Top and Flop ETFs of Last Week).
Vanguard Energy ETF (VDE - Free Report)
The fund tracks the MSCI US Investable Market Energy 25/50 Index. It comprises 139 holdings. The fund’s AUM is $3.7 billion and expense ratio is 0.10%. It carries a Zacks ETF Rank #2 with a High risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
The fund tracks the S&P Oil & Gas Exploration & Production Select Industry Index and comprises 73 holdings. Its AUM is $2.6 billion and expense ratio is 0.35%. It carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares Global Energy ETF (IXC - Free Report)
The fund tracks the S&P Global Energy Sector Index and comprises 70 holdings. Its AUM is 1.4 billion and expense ratio is 0.47%.
VanEck Vectors Oil Services ETF (OIH - Free Report)
The fund tracks the MVIS US Listed Oil Services 25 Index and has 25 holdings. Its AUM is $926.6 million and expense ratio is 0.35%. It carries a Zacks ETF Rank #3 with a High risk outlook.
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