The quarterly earnings cycle rarely leaves us much room to talk about our broad sector recommendations in our Special Opportunities portfolio — Financial Select Sector (XLF) and US Energy ETF (IYE), notes Todd Shaver, editor of Bull Market Report.
Our thesis on both the big banks that dominate the financial sector and the oil producers that play a similar role in Energy is simple. They’re not necessarily going anywhere special in the foreseeable future.
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They are, however, trading at levels that imply substantial upside if anything but a doomsday scenario. To use language we rarely employ here, they’re “cheap,” which makes them ideal "special opportunities."
We aren’t betting on interest rates, commodity prices or any other external factor transforming any of these stocks. While that counts as investment logic for a lot of people, as far as we’re concerned it amounts to leaning on hope instead of hard numbers.
Maybe a barrel of oil will eventually surge beyond $100 and the next wave of Fed tightening moves will give all lenders a pure-profit windfall. In that event, we’ll lead the cheering. But if that miracle doesn’t happen, the downside was limited by the time we launched coverage.
Furthermore, the banks in particular are making their own miracles. Depending on the metric you use, key Financial Select Sector constituents are on track to expand their earnings 7% to 19% this year, which means that from a growth perspective they’re running rings around the market as a whole.
While plenty of our technology recommendations are growing a lot faster (and are thus more attractive on an individual basis), we’d rather be in the financials than anywhere else, especially when you consider that these stocks collectively carry a 13X earnings valuation.
The banks provide better-than-average growth at a deep discount. If they didn’t move as a block, we’d replace the broad ETF with recommendations on the best companies in the space, but for now, there’s no real point in maintaining that level of differentiated coverage.
Energy is a slightly different story because year-over-year earnings comparisons are a lot harder and the stocks are more closely tied to commodity prices.
We’re here primarily to hedge against global tension spilling over into a 1970s-style inflationary shock. If, for example, Iran or another Persian Gulf country melted down, fuel markets around the world would reel before regaining their balance.
US Energy would cushion us in that event, giving us a winner to liquidate while we wait for the rest of our universe to recover. That’s a good thing. And in the longer term, the US Energy ETF is the place to be.
With the United States pivoting from energy imports to become a credible exporter, the companies that this ETF owns have a bright future on the global stage.
When other countries are facing declining reserves and vast drilling costs, our producers here at home have the technology and the expertise to exploit fields that would have been impossible to even find five years ago. One day these stocks will be valued like technology companies. We’re here for that day.
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