Analysts Turn Bullish on Energy Patch

MarketsETF Trends

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The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, is down more than 7% year-to-date, making it one of 2018's worst-performing energy ETFs. That after energy ranked as one of last year's worst-performing sectors, but that is not preventing some analysts from turning bullish on the group.

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Market observers and analysts argue that U.S. energy stocks are in a position to outperform broader equity markets this year, even if oil prices don’t move higher. The energy industry has grown more efficient after cutting costs in response to the plunge in crude oil prices in previous years, so they are now in a better position to bolster revenue even at lower prices.

“Credit Suisse's Jonathan Golub writes that the energy sector as a whole and each of its major sub-groups have 'delivered superior earnings growth since the middle of 2016, thanks to rising oil prices and a strong economic backdrop,” reports Teresa Rivas for Barron's.

XLE tracks 32 energy companies from within the S&P 500 Index. Top holdings include well-known names such as Exxon Mobil (XOM), Chevron Corp (CVX), and ConocoPhilips (COP).

More Bullishness for Energy Stock Valuations

“Golub writes that more recently energy stock valuations have 'come back down to earth,' thanks to robust earnings and sagging share prices. Energy still looks overvalued to a degree, he argues, but not to the extent it once did, leading him to upgrade the group to Market Weight, as the bear case becomes less compelling,” according to Barron's.

Related: Opportunity in ETFs with Commodities Exposure

On Monday, Goldman Sachs also issued a bullish view on the energy sector, noting that the sector actually performs well when it enters “restraint” phases. Goldman has Buy ratings on Chevron and ConocoPhillips.

Over the past 10 years, no sector is as correlated to inflation as is energy and the competition is not even close, according to S&P Dow Jones data.

Declining prices in recent years have prompted scores of major oil producers to rein in capital spending. Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.

Rivals to XLE include the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY). FENY is the least expensive energy ETF on the market with an annual fee of just 0.084%, or $8.40 on a $10,000 investment.

For more information on the oil market, visit our oil category.

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