A Look at Energy Extremes: Identifying the Strongest Stocks in Sector

by: Michael A. Gayed, CFA

The recent surge in oil prices has caused a rush of money into the energy sector of the stock market (NYSEARCA:XLE). According to IndexUniverse, XLE was “last month's most popular fund” with over $1.5 billion of new assets being put to work in the ETF. Energy stocks have handily outperformed the broader market in a way that (to me at least) is very reminisicent of the first half of 2008.

I took a look at the holdings of the XLE ETF and ran a screen to find those energy stocks which are furthest away from their respective 20 day (one trading month) moving averages. The purpose of this is to identify what the strongest stocks have been in the group given recent trends, and see if there is anything worth noting in terms of the types of companies performing well.

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The list spans the spectrum – from oil drillers to natural gas to coal. Strength in drillers should be expected, since higher oil prices should theoretically result in more contracts, particularly in deep waters where oil is expensive and more difficult to extract. Natural gas and coal stocks are also doing well because those alternative sources of energy look comparatively cheaper to oil.

The question is whether such strong absolute performance will continue in the sector. I use the word “absolute” here because should oil prices continue at their current pace, the probability of a “beta” driven correction may result in all stocks of all sectors likely declining in price. Looking at the price ratio of oil (NYSEARCA:USO) to energy stocks (XLE) does seem to suggest that oil itself is better than holding energy stocks should the trend of outperformance continue.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.