Energy might be the S&P 500’s worst performing sector this year, but now may be the time to consider energy stocks.
The XLE S&P 500 Energy Sector SPDR is down more than -20% from its highs reached late last year, and is technically in a bear market. And while the ETF has gained nearly 4% year-to-date, that return is a far cry from the S&P 500’s 25% rise.
But as crude oil surged to a two-month high last week following reports that OPEC and its allies were likely to extend output cuts until mid-2020, some strategists see energy stocks as a low-cost opportunity.
Piper Jaffray senior technical research analyst and managing director Craig Johnson says that there’s “no question” that now is the time to do a “bottom-fishing exercise” with energy stocks.
“Talking to all these institutional accounts, they do not like energy. They don’t want to touch energy. They’ve been burnt in energy for so long,” Johnson said. “And fundamentally, they’re going to point out all the problems with it. But as a guy that likes to look at charts, these stocks tend to lead the market six to nine months ahead of time.”
Looking at the chart for Valero Energy (NYSE: VLO), Johnson says there’s “very nice consolidation” followed by a breakout with significant volume.
“Now we’re coming back to retest support,” Johnson said. “On this retest back to support toward $95, I’m a buyer of this stock because I think you’ve got upside to the $120s.”
The $120 level would see Valero shares rally nearly 24% from current prices, adding to the stock’s 29.5% year-to-date return.
The next stock that caught Johnson’s eye is Marathon Petroleum (NYSE: MPC).
“Next, if you look at Marathon, you’ve got a pretty good double-bottom in the making here,” Johnson said.
“[The] stock has broken out, it’s coming back to retest support, but, again, I like it on this pullback and retest of support,” he said.
The next stock Johnson would consider is National Oilwell Varco (NYSE: NOV).
“This is a stock that’s sort of been in a downtrend for quite some time, but that downtrend is starting to flatten out here in the low $20s,” Johnson said.
“If I’m right, this stock could rally as high as into the mid-to-low $40s,” Johnson said. “So, again, lot of negativity,… but the charts are telling us something that is more constructive.”
At the low end of Johnson’s target at $40, National Oilwell Varco shares would see a gain of nearly 76% from the current price.
Analysts are less bullish on National Oilwell Varco shares, though their average price target still suggests plenty of upside ahead indicating a gain of 21% over the next twelve months.
Wall Street also sees double-digit upside ahead for Marathon Petroleum. The average analyst price target for MPC indicates 19% upside over the next year.