6 Reasons To Buy These Energy ETFs And Stocks Now

The hated energy sector is now back in favor with $65 crude (up about 9%) and bullish analyst comments. A host of analysts have started betting big on this unloved sector. Credit Suisse analysts view the space as attractive for the first time in two years and have raised their rating to market weight from underweight.

Morgan Stanley too is placing bullish bets on energy and has an overweight rating on it. The space, measured by Energy Select Sector SPDR ETF XLE (down 2.7%), outperformed the broader market denoted by SPDR S&P 500 ETF SPY (down more than 4.9%) in the last one month (as of March 28, 2018) (read: Energy ETFs Rally: Will the Gains Last?).

Analysts believe that the winning trend in the energy space will be maintained ahead. Below we highlight the reasons behind this bullishness.

Solid Earnings Growth

Energy sector earnings are expected to be up 60.8% in the first quarter of 2018 from the year-ago period after 157.2% year-over-year earnings growth in the preceding quarter, per the Earnings Trends issued on March, 23, 2018. Revenue growth will likely be 15.7% in Q1 after a 23.8% increase in top line in Q4.

Compelling Valuation

Credit Suisse analysts believe that extended valuations led energy stocks to underperform since mid-2016, despite a favorable operating backdrop and strong earnings. But a host of tailwinds and “weaker stock prices makes the sector's valuations more attractive than they have been in several years."

The Shiller P/E for energy sector is 18.60x, the lowest among the S&P 500 universe. The broader market index has a Shiller P/E of 31x.          

Geopolitical Concerns

Geopolitical risks in the Middle East, especially the strained relationship between Saudi and Iran, can act as a key driver. The Arab coalition led by Saudi Arabia said on Monday that the wreckage of missiles fired by Houthi rebels in Yemen bore features of weapons made near Tehran, Iran. Saudi Arabia also declared the 2015 nuclear deal between Iran and global powers a “flawed agreement.”

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