Energy is losing steam.
Oil prices saw their worst trading day in four years on Thursday after the Trump administration said it would put further tariffs on Chinese goods. Energy stocks, already under pressure from a dramatic quarterly profit miss at exploration and production company Concho Resources, fell further, with the Energy Select Sector SPDR Fund, or XLE, dropping more than 2%.
And although market watchers often see drops like these as chances to buy high-quality names that have been overly punished, “it’s hard to call it a contrarian opportunity right now” in the energy sector, said Matt Maley, chief market strategist at Miller Tabak.
“This group has really been dead money most of this year,” he said Thursday on CNBC’s “Trading Nation,” referencing the XLE. “It’s been a rough ride. And … we see the XLE has formed what’s called a symmetrical triangle pattern.”
That pattern tells Maley two things: that if the XLE can break out of the triangle soon, it could make for a big move; and that the longer it trades within the triangle’s boundaries, the smaller that breakout move will be.
“The deeper you get into the pattern, the less of the move we get,” he said. “So, even if we break out of this pattern sometime soon, I don’t see a big, compelling move. You’re going to have to wait until you see a big move either above the highs for this year … around [$]68, or below the lows at 58, before you can really make a compelling decision.”
All in all, for Maley, “it’s hard to make a compelling bet to the upside right now,” he said.
But that wasn’t the case for Mark Tepper, president and CEO of Strategic Wealth Partners.
Despite the fact that “energy’s just in a death spiral,” Tepper still saw buying opportunities in the space, which he agreed has been “dead money” for years.
“In our opinion, if you’re investing in energy stocks, it’s all about being selective and finding that right entry point, and there’s lots of companies today that are being unfairly punished,” he said in the same “Trading Nation” interview. “FANG’s one of them, Diamondback Energy. And, with the pullback today, I would view that as a buying opportunity. “
As the lowest-cost producer in the oil-rich Permian Basin area of western Texas, Diamondback’s advantage is that it “can actually make money when oil’s below [$]50 bucks a barrel,” Tepper said.
The company also has a decisive, disciplined and cash-conscious management team and an attractive valuation, he said.
“They’re in a high-growth area, they’ve got a [price/earnings-to-growth] ratio of 0.5, so you’re basically paying next to nothing for that growth at this price,” he said, referring to a metric used to value a company by its price-earnings ratio and its expected earnings growth. “We like them here.”
Disclosure: Strategic Wealth Partners has a position in Diamondback Energy.
