Ho hum, another record in the major market indices. If you want to play catch-up, here is a lower risk idea to energize your portfolio. The most recent BoA Global Fund Manager Survey showed that managers are dramatically underweight energy stocks. The sector is hated, unloved, and beaten up.
Whether you are bullish or bearish on the stock market, energy stocks might be a contrarian way of making a commitment to equities with a favorable asymmetric risk/reward profile.
Energy stocks are performing well on a relative basis. The Energy SPDR ETF (XLE) is tracing out a constructive double bottom pattern relative to the market. This pattern is confirmed by the relative performance of European energy stocks (green line, top panel), and the relative performance of individual energy industries within the sector. I interpret these conditions as the sector is wash-out and poised for a rebound.
Investors may be in a position to get paid for waiting for a rebound. The indicated dividend yield on XLE is 11%, but dividends are being cut, and the annualized yield based on the last quarterly dividend is 5.5%, with the caveat that dividends could be cut further.
From a top-down perspective, the IEA has also documented how the COVID Crash has crashed energy demand that is largest since the end of World War II.
I am not making any forecasts about when the recession ends, and when energy demand normalizes. However, the combination of wash-out sentiment, constructive relative return patterns, and the upside potential of a demand recovery makes the energy sector a classic contrarian and value selection for equity investors.