Energy Sector Outperforming the Market
2018 was a rough year for stocks.
But the early months of 2019 are looking quite promising.
Following a historically bad December in the stock market, we just had one of the best Januarys in decades.
And so far, that momentum has continued into February.
But where in this broad rally should investors pony up their dough?
As I’ve stated before, I believe investors should focus their attention on sectors trading at cheap valuations.
Right now, I believe the energy sector is one of those.
It was hit hard last year – dropping as much as 33% from its 2018 highs – and was already being rocked by decimated oil prices.
(In the latter half of 2018, oil prices declined more than 40% from their recent highs.)
Coupled with a broader market correction and fears of another oil price war, energy stocks lost favor last year.
But here’s why I believe investors should give the sector another look…
That likely stems from OPEC’s recent production cuts, which aim at buoying oil prices and pushing them higher in an effort to restabilize the market.
This too has helped push energy stocks to market-beating gains over the past several weeks.
In fact, after the industrials sector, energy has booked the largest gains in the market.
But it’s not simply the near-term prospect of rising oil prices that makes the energy market attractive. It’s also the prospect of buying undervalued stocks positioned to outperform over the long term.
Especially compared with other areas of the market.
For example, on the basis of price-to-earnings ratio, energy stocks are some of the cheapest stocks in the market today – even as they’re booking some of the best gains of this year…
Though price-to-earnings is a popular valuation metric, earnings can be more easily manipulated than other line items.
So it’s generally good to look at a variety of value metrics.
Below, we can see that even on the basis of price-to-book ratio, which compares a company’s share price to its net assets per share, energy stocks are extremely cheap right now…
What does this tell us?
That investors should take full advantage of the opportunity last year’s correction handed them.
They have a chance to buy value plays in this bull rally and maximize their long-term gains.
Buying sector-focused ETFs like the Energy Select Sector SPDR Fund (NYSE: XLE) offers investors a simple, diversified way to capitalize on these trends.
But it’s not the only way.
A more aggressive approach would be a leveraged play. Something like the Direxion Daily Energy Bull 3X Shares ETF (NYSE: ERX), which tracks the sector with three times its daily returns.
To date, this leveraged play has churned out more than a 36% gain for traders – a good deal for just a few weeks.
Keep in mind: Setting aside part of your portfolio for leveraged plays can add some extra bang for your buck, but you don’t want to bet too heavily on these trades, as they are typically more volatile.