It wasn’t too long ago that energy stocks were some of the market’s highest fliers.
The Energy Select Sector SPDR ETF (XLE) bottomed in March 2020, not long after Covid-related shutdowns began, and more than tripled by early June 2022 – a scorching 280% surge in just over two years.
But the last year has been a different story. XLE is down about 10% since last June, and we even down twice that much at times in 2022.
So far in 2023, my Quantum Edge system picked up some Big Money buy signals (green bars) earlier in the year, followed by massive selling (red bars) in March and not much buying after that.
XLE is up 5% in June (bottom yellow circle).
That’s not enough to get my attention on its own. But that uptick in Big Money inflows has triggered by interest.
My Quantum Edge system also ranks sectors according to their fundamentals and technicals. And last week, Energy moved up for the first time in a while, jumping from the bottom half of my sector rankings to the top half… from No. 7 to No. 5.
Some of that jump was likely ignited by Saudi Arabia’s surprise production cut – with the key OPEC member vowing to cut July output by a million barrels a day. Oil prices did edge up following the news.
And some of that oil-price bump was probably due to increased seasonal demand. Summer is the big driving season, and prices at the gas pump have also crawled higher of late.
Whatever the reason, despite these green shoots in Energy, the underlying scores in my system aren’t sending a “buy” signal.
At least … not yet.
In our talk here today, I’m going to show you what those signals do say. And I’ll tell you what I’m watching for – so we’ll know there’s a buying bullseye on energy stocks. Plus, I’ll give you two stocks I’d avoid – and two more I’m putting on my “watch list.” These are two I’ll hammer the gas pedal on when energy stocks are a buy again (see what I did there?).
Let’s start our sector inspection with the XLE ETF itself. One of the great things about my system is that it rates ETFs – as well as individual stocks and entire sectors.
The Energy Select Sector SPDR ETF (XLE) rates an overall Quantum Score of 52.5, a bit below my mental buy trigger. The fundamental score of 66.9 is actually pretty strong. But the technicals are a weak 42.3.
Sticking with our energy motif, let’s check “under the hood” to see what the ETF is holding.
The first thing that jumps out is how the two biggest companies by market value – Exxon Mobil (XOM) and Chevron (CVX) – account for 42.5% of the entire fund’s weighting. That’s what I call top heavy.
Unfortunately, neither oil giant is lighting up my screen at the moment. XOM’s Quantum Score is 53.4. And CVX is a close-behind 51.7.
Here again, the fundamental scores aren’t bad at all (62.5 for XOM and 70.8 for CVX). But the weak technicals (47.1 and 38.2, respectively) drag down each stock’s Quantum Score rating. Given that neither stock has been a hot performer this year, their weak technical rankings aren’t a surprise.
The bottom line here: While these new buy signals are definitely interesting, it’s not quite time to go all in on Energy stocks.
Two Stocks to Watch
I’m a self-professed data nerd, as members of my Quantum Edge services can attest. I like to slice and dice data – to uncover the true gems that are hidden from the investing masses.
There may not be any sparklers at the moment – but there are a few big bursts we’ll be scanning the skies to see.
The ETF’s strongest stock fundamentally is Coterra (CTRA), an oil and gas play based in Houston. CTRA has an impressive 83.4 Fundamental Score, but the stock has gone nowhere in 2023, stuck between $23 and $26.
We’ve seen only two Big Money buy signals over the last 12 months. And we’ve seen eight sell signals during that same stretch. The sell signals have been smaller in size but bigger in number.
If and when energy shares gather some momentum, CTRA could be an interesting possibility.
The strongest stock overall is the Pittsburgh-based natural-gas player EQT Corp. (EQT) – with a Quantum Score of 67.2. That’s pretty close to my target “buy” range of 70 to 85. It’s interesting that the strongest stock in this ETF happens to be the biggest natural gas producer in America.
Oil has gotten the headlines. And natural gas prices are low. But the data doesn’t lie.
EQT’s fundamentals are excellent with a 75 rating, while the technicals are also the best of the bunch at 61.8. That’s not surprising, given the stock’s 20% surge in just the last month.
There’s an interesting dynamic at work, which goes by an odd name – contango. It means that the futures price of natural gas exceeds the current “spot” price. This happens when natural-gas prices are expected to increase over time. And it’s bullish natural gas producers.
And unlike with CTRA, we have seen recent Big Money interest in EQT with three signals in a little over a month.
EQT looks like one of the most interesting Energy stocks for your watch list. The sector itself may not be on fire – at least yet – but this company has excellent fundamentals, strong technicals, and Big Money support. Those are the most important factors in my Quantum Edge system that signal higher prices ahead.
Editor, Jason Bodner’s Power Trends