Are energy stocks still a buy after November’s epic run?
- Energy stocks are on pace to end November higher by nearly 40%.
- However, the group is down nearly 40% over the past 10 years.
- Two pros are bearish on the sector and investors should be extremely selective.
November has one trading day left on the calendar but energy stocks are on pace to close its best month in history. Does this mean that one of the most impacted sectors amid the COVID-19 pandemic is in the clear and the momentum can continue?
The S&P energy sector is on pace to end November 40% higher than where it started, according to a recent CNBC’s “Trading Nation.” But put in perspective, the gains are quite insignificant.
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Since 2010, the S&P 500 index has gained more than 200% while over the same time period, the XLE Energy ETF is down nearly 40%.
Clearly, the energy sector has been a place investors send their “money to die” over the past decade, Strategic Wealth Partners President Mark Tepper said on “Trading Nation.” The importance of the energy sector has also diminished over the years as the group accounted for around 15% of the entire S&P 500 index. Today, it is around 2.5%.
“It’s almost irrelevant,” he said.
Dead cat bounce?
The energy sector may have undergone a “dead cat bounce” rebound as short traders cashed in their profits. Recall, a short position must be closed with the purchase of a stock — thereby driving the price higher.
Throughout November, short traders started “to get a little nervous” and covered their position, TradingAnalysis.com Founder Todd Gordon also said on “Trading Nation.”
“The XLE [energy ETF is up 35%] in November,” Gordon also said. “I mean, that’s unbelievable. That smells like short covering; that doesn’t sound like new fresh buying interest.”
If Tepper were to hold one stock in the energy sector, it would be Diamondback Energy Inc (NASDAQ: FANG). The energy company is a low cost producer which makes it among the few in the industry that can turn a profit when oil trades south of $40 a barrel.
Diamondback’s management team remains committed to rewarding investors with a dividend that currently yields above 3%.
“They’re doing everything we like,” Tepper added.
Gordon sees an opportunity in a hot stock that is already up big in 2020: Sunrun Inc (NASDAQ: RUN). The provider of residential solar, battery storage, and energy services may not fall under the traditional definition of an energy stock but shares are higher by nearly 400% in 2020.
Investors seem to be betting that clean energy companies are the future of the industry.
“Love it,” he said. “ I hold it. I think sticking with what works for now [is the right strategy].”