As we saw yesterday, the energy sector’s 3% gain last week absolutely crushed the broader market’s performance.
It’s been a couple of months since XLE led the pack, and as I’ll show you today, one factor within my Green Zone Power Rating system still stands out.
I’ve been harping on the cheapness of energy stocks for years now, and that’s for good reason…
Paying a favorably low price for stocks that also rate well on factors like Momentum, Quality and Growth can really supercharge your returns in the long run.
I’ll show you why momentarily.
But first, let’s run the energy sector through my Green Zone Power Rating x-ray…
Energy Sector X-Ray
Two months ago, my x-ray showed us that the energy sector was surprisingly bullish, considering we were in the midst of a tech-driven bull market.
And the breakdown between “Bearish,” “Neutral,” and “Bullish” stocks has mostly remained intact in my latest screen:
One-third of stocks in the sector are currently rated “Bullish,” while another 43% fall into the “Neutral” category. With only five “Bearish” stocks (24%), we have a great chance of finding stocks that will at least track the broader S&P 500’s performance over the next 12 months.
Past performance doesn’t guarantee future results, of course, but when you consider that the S&P 500 has gained almost 15% over the last year, investing in a stock with similar performance isn’t a bad deal at all. And we have a good chance of finding stocks within the sector that can do even better!
What’s more, looking at the energy sector’s individual factor ratings within my Green Zone Power Rating system tells me that we don’t have to pay a hefty premium for this outperformance either…
Energy Sector Still Trades at “Dirt Cheap” Valuations
Listed in order, from the factor with the most “Bullish” stocks down to the factor with the least number of bullish stocks, here’s how the energy sector looks today:
To broadly define the energy sector based on these factor ratings, I’d say that we have a group of incredibly strong businesses that are growing at a steady pace. And while there aren’t many individual stocks exhibiting market-crushing price momentum, you’ll pay a fair — if not incredible — price for almost any stock you find here.
We’ve touched on this a bit lately, but it bears repeating…
Sky-high tech valuations have been in sharp focus as investors continue pushing major indexes to record highs. Things still look rosy now, but eventually, a stock’s price and a company’s earnings have to fall in line. And the two most common ways that can happen are:
- A company generates more profits to meet investors’ lofty expectations.
- Investors sell off the stock to bring those valuations down to more reasonable levels.
Can you guess which scenario is easier to pull off?
This is where my Value factor of Green Zone Power Ratings comes in. We can look at metrics such as price to earnings (P/E) or price to book value (P/BV) to determine if we’re paying a fair price for a stock.
When combined with my five other factors, we can find stocks that are both trading at a fair value and exhibiting market-beating momentum.
In the table below, I’ve pulled the 15 energy stocks that are trading below the sector’s average P/E ratio of 16.7:
As you can see, all 15 tickers boast “Bullish” Value ratings, and some are trading at a fraction of the sector’s P/E ratio. What’s more, all of these stocks are trading well below the S&P 500’s average P/E ratio of 29.8 and the tech sector’s (XLK) average ratio of 37.5.
What’s more, 13 of the 15 stocks rate either “Neutral” or “Bullish” overall, and only two rate “Bearish.” That means that most of these stocks should at least track the S&P’s performance in the coming months. That’s not too shabby!
You can look up any of these tickers now by joining Green Zone Fortunes and gaining unlimited access to my system. Click here to find out how to do just that.
To good profits,
Editor, What My System Says Today