It has been a tough year for energy-sector bulls, no doubt about it.
As my colleague David Dutkewych pointed out last week, crude oil prices plunged almost 11 percent during the second quarter. And year-to-date, black gold has been the worst performing commodity, down 17.6% since January 1st.
It’s been so bad that even die-hard energy bulls are throwing in the towel. But that kind of capitulation is exactly what makes up lasting bottoms.
And as David pointed out last Thursday, oil may not have bottomed quite yet. However, a tradable bottom is fast approaching for energy-sector stocks.
Here are four good reasons why …
First, after working through a glut of crude oil supply in recent months, the supply-demand picture is now swinging back into balance. I won’t go into the same stats David covered last week, but suffice it to say that crude oil inventories are set to decline in the months ahead, perhaps by 1 million barrels a day or more.
Second, energy bulls are running for the hills. The net positioning by speculators in NYMEX crude oil futures has dropped by about 50% from the peak early this year. Even mom-&-pop investors are throwing in the towel on energy.
One of the largest ETFs tracking energy stocks, the iShares Dow Jones US Energy Sector ETF (IYE), has suffered cash outflows of $45.8 million year-to-date, and $5.4 million in the past week alone! Retail investors are cutting their losses and running away from the sector.
Third, Energy stocks are a screaming bargain right now. They’re the cheapest EVER on a price-to-book value basis relative to the market, as you can see above. And that’s despite massive asset write-offs due to production cutbacks after the slump in oil prices.
Fourth, Wall Street HATES the energy sector right now, which instantly fuels my contrarian buying interest. Active mutual fund managers are historically underweight the energy sector, with their energy-stock holdings 20% less than the benchmark weighting in the S&P 500 Index!
What’s more, the energy sector’s percentage weight in the S&P 500 Index is now down to just 6%, the lowest level in thirteen years. And the last time the sector was this undervalued, back in 2004, energy stocks soared 275% higher over the next four and a half years!
Bottom line: We could see oil prices pull back some over the next few weeks, which could keep energy-sector stocks under pressure. But I expect a sizable rebound rally in the oversold and undervalued energy sector later this month.
The new uptrend should boost select energy stocks substantially next month. A great way to profit from the uptrend would be a shotgun approach with shares of IYE or the Energy Select Sector SPDR ETF (XLE), which both track a broad index of U.S. energy stocks.
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