Even as stocks were suffering from trade-related tensions last week, one key sector was steadily notching up gains. While all other key sector SPDRs of the S&P 500 incurred losses over the last five trading days, the Energy Select Sector SPDR (XLE) gained 2.6% over the same period. Analysts feel that this long-neglected sector is poised for a rebound on the back of earnings growth and impressive valuations.
Other sector experts feel that the sector is entering a period of restraint, one which is traditionally beneficial for stock performance. Fresh geopolitical risks have also surfaced recently and are likely to support oil prices in the near term. Taking all these factors into account, this is an excellent time to invest in select oil value plays.
“Restraint” Phase Best for Sector Performance
Analysts at The Goldman Sachs Group, Inc. (GS – Free Report) think the oil sector is in the process of exiting a contraction phase which began during the commodity slump of 2014. Soon oil companies will enter a period characterized by restraint. At this point, worries surrounding the effect of electric cars and fears about oil demand plateauing will lead to a more conservative approach from oil companies as a whole.
In such a phase, the focus shifts to curtailing investments and erecting stiff barriers to entry. The investment bank feels that it is during periods of restraint that oil companies exhibit their best performances. According to Goldman, the legend that a period of rising oil prices leads to better performance from the sector is wholly unfounded. Instead, such a phase is characterized by rising costs and inefficiencies which weigh on margins.
Earnings, Valuations Boost Prospects
Meanwhile, analysts at Credit Suisse Group AG (CS – Free Report) think that the attractiveness of energy stocks has increased due to robust earnings growth and attractive valuations. According to researchers at the firm, strong fundamentals and soft stock prices have raised the attractiveness of sector valuations.
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