Energy Sector Shines
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Events in the Middle East continues to stoke fears on rising gas prices, not just in Iran but Saudi Arabia too. This uncertainty spills into the broader market, suppressing demand for stocks. However, one sector which is certain to benefit is energy. The leading energy exchange-traded product, Energy Select Sector SPDR Fund (NYSEMKT: XLE), enjoyed increased volume buying over February, without sparking a rally in price. This controlled buying in the absence of a price rise may seem counterintuitive, but once larger funds have had their fill they will look to stir the hornets' nest and get energy stocks moving.
To give an idea as to the scale of buying in this sector, Hard Assets Investor reported $692 million of investment inflow to energy-based exchange-traded products last week, of which $214 million flowed into XLE alone. This can be compared to total inflows of $60 million to all precious metals exchange-traded products and just $6 million to industrial metals exchange-traded products.
However, energy has sharply underperformed relative to other sectors. This underperformance is clearly highlighted when the XLE is compared to another traditionally defensive sector, Consumer Staples Select Sector SPDR Fund (NYSEMKT: XLP). Both sectors took the pain in the 2008 meltdown, but where Consumer Staples was able to rally to and above 2008 highs, the Energy Select has still to mount its first serious challenge.
If we delve into some of the components of the XLE, we can see stocks attracting individual attention. One such stock is Devon Energy (NYSE: DV). Yesterday Devon traded nearly $1 billion in volume as it beat estimates and boosted reserves. According to Estimize, Devon Energy has comfortably beaten estimates for the last three quarters. Devon Energy stock holders will be happy to see the stock past $70 after months knocking around in the $60s. With $60s history there is a golden opportunity for a move to the last stumbling block of low $90s in early 2011. Yesterday's buying will have done much to set the groundwork for such a move.
But Devon Energy is only one small part of the Energy Select Sector SPDR Fund (NYSEMKT: XLE). Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) account for 32% of Energy Select Sector SPDR holdings. How are these two stocks performing?
Exxon Mobil Corporation (NYSE: XOM) is nicely placed to follow Devon's lead. The stock is trading just below $87.50, a stumbling block dating back to 2008, but one which offers plenty of fresh air above if broken. Fourth quarter earnings came in at expectations and the next release is not expected until May; so earnings will have limited influence until then. Therefore it will be left to rising oil prices to drive a break of $87.50. Chevron Corp (NYSE: CVX) has gone a step further than Exxon having surpassed the 2008 high around $90 in 2011 and is currently applying pressure on $110. Note how the price dip in the latter part of 2011 only briefly violated the $90 price level. Ironically, its most recent earnings came in below expectations and it guided lower to boot. But stock holders shrugged off the news and held on to their stock. Despite the strong price advance the stock still pays out a healthy 3.0% dividend yield which will make it more attractive should Chevron suffer any future price weakness.
It could be an interesting few months for Energy stocks and Exchange Traded Products. Buying demand is increasing for Energy stocks. This demand will eventually express itself with higher prices, which will filter through to other stocks in the sector. Exchange Traded Products, like the Energy Select Sector SPDR Fund (NYSEMKT: XLE), offer the best opportunity to benefit from the growing demand for individual stocks while spreading the risk across the sector.
No Positions Held