Checking the Energy Sector's Setup

 | Apr 22, 2013 | 4:06 PM EDT  | Comments
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Stock quotes in this article:

xle

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ung

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cvx

Energy is a sector that must be played very carefully. Since seasonal effects make certain companies more effective during certain parts of the year, we will attempt to break down the opportunities in the energy space. The summer driving season is just around the corner, and that tends to drive gasoline prices higher.

Looking at the top 10 holdings within the Energy Select SPDR ETF (XLE), we can identify a few things right off the bat. One, most of the companies have lower price-to-earnings multiples than the ETF and the broad market as a whole. This should be no surprise, as most of these companies have major oil operations, and oil prices have been coming down.

However, energy companies in general have low debt to equity, hence they can be good equity plays from a credit metric. Also, most of these companies produce solid profit margins and growth within their EPS. And since the energy sector as a whole has come down, some companies support dividend yields that are over 3%.

One company that is interesting from both a fundamental and technical perspective is Chevron (CVX). From the fundamental side, the stock carries a very low P/E multiple that is two-thirds of that of the ETF as a whole, and it pays a very attractive dividend above 3% with solid profit margins and virtually no debt. Of course, if a company has a low P/E or low price, it can certainly go lower unless there is some sort of catalyst. In this case there are two: the summer driving season and the rise in natural gas prices.

 

XLE Top 10 Holdings

 

Taking a look at the technical side of the XLE, here is a daily cloud chart, which is bullish because of the catalysts mentioned. Price is still hovering within the bottom portion of the cloud. As long as price holds within the cloud from above the cloud, then the XLE is still in bullish territory. All signs for the weekly cloud are likewise bullish.

 

 

Taking a look at natural gas, we have had a very big run-up in the U.S. Natural Gas Fund (UNG) over the past two months. After such a sharp run-up, a pullback is very possible, but it still remains the best play in commodities to remain bullish on.

 

Here's where the price of natural gas could go.

 

UNG Daily Point and Figure

 

As for Chevron, price is within the cloud, and both the daily and weekly cloud charts remain bullish. Chevron has a lot to gain with increasing natural gas prices and the summer driving season, which could help its bottom line in the coming quarter.

 

 

 

CVX Daily, Point and Figure

 

Overall, the energy space is very exciting, from a cyclical or long-term view. The case for Chevron can be made both ways, and it doesn't hurt to hold it, given the 3% dividend yield. It may also be wise to wait on the sidelines for possible pullbacks or corrections, as some names have risen too fast and too quickly. 

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