Oil Services ETFs Gaining Momentum
After taking the brunt of the selling in response to the plunge in energy prices, the oil services sector and related exchange traded funds may be finally breaking out.
Over the past month, the iShares U.S. Oil Equipment & Services ETF (IEZ) rose 8.5% and the SPDR Oil & Gas Equipment & Services ETF (XES) gained 9.1%. More importantly, both funds are now trading above their 100-day simple moving averages. [For the Contrarians, Earnings Surprises Could Fuel Energy ETF Plays]
Rich Ross, head of technical analysis at Evercore ISI, argues that investors should take a look at the oil services space after the PHLX Oil Service Sector Index, OSX, decisively broke above the 100-day moving average for the first time since July 2014, reports Alex Rosenberg for CNBC. [Oil Services ETF Could be Ready to Rally]
This was “a very important breakout today for the OSX,” Ross said on CNBC. “That’s generated a very strong buy signal here.”
Moreover, the sector is coming off a double bottom – a charting pattern that reflects a drop in prices, a rebound, another drop to the same level as the original drop, and another rebound. After a double bottom, technical analysts typically predict a 10% to 20% gain off the first bottom. Ross, though, has a very optimistic prediction of up to 25% worth of upside ahead.
IEZ is up 14.7% since its first bottom on January 15 while XES is 14.4% off its first bottom.
All in all, “we think there could be another 15, 20, 25 percent upside in these OSX names,” Ross added.
Erin Gibbs, equity chief investment officer of S&P Capital IQ, also believes that energy stocks may be attracting more buyers after its swift rebound over the past month with oil.
“I think as we move further in the year and people start looking at 2016 and we start looking again back at growth, these companies are really going to have that value,” Gibbs said.
Since the sector’s sell-off, many energy names are trading at cheaper values relative to the broader market. For instance, IEZ has a 17.49 price-to-earnings ratio and a 1.28 price-to-book while XES shows a 15.04 P/E and a 0.92 P/B. In contrast, the S&P 500 index is trading at a 18.42 P/E and a 2.57 P/B.
Moreover, Gibbs points out that energy stocks provide a more attractive 3% dividend yield, whereas the S&P 500 has a 2% yield.
“So I just see a lot more potential appreciation, versus the broader index, for energy,” Gibbs added.
iShares U.S. Oil Equipment & Services ETF
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
