By Justin Spittler, editor, Casey Daily Dispatch
It finally happened.
Energy stocks have “broken out.”
See for yourself. This chart shows the performance of the Energy Select Sector SPDR ETF (XLE) over the last 12 months. XLE invests in 36 major U.S. energy stocks.
You can see that XLE has surged 8% over the last month. That’s quadruple the S&P 500’s return over the same period.
More importantly, it just broke through a downtrend that it’s been in since December.
This is extremely bullish. It’s the buy signal that I’ve been waiting on for months…
• Back in June, I said a huge opportunity was setting up in energy stocks…
I told you that energy stocks were beginning the bottoming process.
But it still wasn’t time to pull the trigger.
You see, energy stocks were still in a downtrend back then. And stocks in downtrends tend to keep falling.
But that’s no longer the case. Energy stocks have broken out.
That said, I would never buy something based on price action alone. So, I’m going to tell you the other reasons why I like energy stocks today. And I’ll also show you an easy way to profit from this opportunity.
But let’s first look at why I’ve been stalking this sector like a vulture.
• Energy stocks have lagged the market for nearly a decade…
You can see what I mean below. This chart compares the performance of XLE with the SPDR S&P 500 ETF (SPY), which tracks the S&P 500.
When this line is falling, it means XLE is doing worse than the S&P 500.
As you can see, energy stocks have been underperforming the broad market for nearly a decade. You would have done much better blindly owning the broad market in an index fund.
• When stocks do poorly for this long, most investors give up on them…
They move on to something else.
And that’s exactly what happened. Today, energy stocks make up just 5.9% of the S&P 500. That’s down from 42% in 2013.
At this point, investors hardly own any energy stocks. They’re acting like the U.S. oil and gas industries are going out of business.
But we know better.
You see, the energy sector is highly cyclical. It goes through booms and busts.
And it’s been a bloodbath in the energy sector the last three years.
The prices of oil and natural gas are both down over 50% since their peaks in 2014.
Low energy prices have pummeled energy companies, including the sector’s blue chips. Chesapeake Energy (CHK) plunged 86%. At one point, many investors thought the company would go belly-up.
But it looks like that downturn has finally run its course.
Energy stocks are soaring, after all. And there are plenty of reasons why this rally should continue…
• For starters, energy companies are about to make a lot more money…
According to MarketWatch, analysts expect the energy sector to show a 109% jump in profits when the third-quarter earnings season wraps up.
For perspective, analysts expect third-quarter profits for the S&P 500 to rise just 4.5%.
Rising profits are a recipe for higher share prices.
The market hasn’t priced this in yet. If it did, energy stocks wouldn’t be so cheap.
But don’t just take my word for it.
• Morgan Stanley thinks energy stocks are a screaming buy…
The U.S. banking giant wrote in a recent note to investors:
Energy stocks have never offered such value relative to the broader market on a Price/Book basis.
The price-to-book (P/B) ratio is a popular valuation metric. It compares a company’s share price with the value of its underlying assets.
So, Morgan Stanley’s saying these stocks have never been cheaper relative to their underlying assets. But it doesn’t think they’ll be on sale much longer.
We are even more convinced an important turn is happening…The relative and absolute price moves for the sector have definitively broken their well-defined downtrends from last year.
In other words, one of the world’s largest banks is now saying what I’ve been telling readers for months.
• Soon, everyday investors will turn bullish on energy stocks, too…
When that happens, watch out. Money should pour into the sector like we haven’t seen in years.
You’ll obviously want to own energy stocks before that happens. And you can easily do so with a diversified fund like XLE.
Just understand that energy stocks are volatile. So, treat them like a speculation.
Don’t bet more money than you can afford to lose. Use stop losses. And take profits when you get them.
This way you’ll be able to capture big profits without exposing yourself to heavy losses.
September 26, 2017
Doug—I remember seeing many years back that a “rare” royal blue Ty Beanie Baby Peanut sold for $5,000. Retail was $5.
Cryptocurrencies are—to me—a fad. Like Beanie Babies, an emperor with no clothes. [I] hope the guy with the $5,000 Beanie Baby got out in time… [There are] still a few die-hard collectors around, but mostly they sell for a buck at yard sales.
I wish those who invest all the best, and that they get out before the feds move in to regulate it. I enjoy your contrarian views immensely, even when we disagree.
Bitcoin is just another dot-com scam. No intrinsic value. It’s a complete digital creation and not backed by anything or anyone. Plus it’s used by Iran and North Korea and tax dodgers and ISIS.
Do you think cryptocurrencies are a fad or a scam? Or are you speculating on them today? Let us know right here.
And a new reader writes in with an important question to help get started with investing…
I am brand spanking new at this. So far, I find all your information very easy to understand, but I have some questions about vocabulary. Sometimes I can find definitions that make sense within the context by "Googling," but even "Googula" (as we call it) doesn't know everything.
I'm wondering if there is a glossary of terms as they relate to investing somewhere? Do you have such a creature hidden somewhere in the back?
Thanks for writing in, Vicki. We do—you can check out our mining glossary (which also covers key investing terms) right here.