4 Reasons to Bet Big on This Winning Sector

By TradeSmith Research Team

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Markets are fraught with fear lately.

That said, energy stocks are one of the few shining stars in a sea of red… and for good reason.

Let’s start with the obvious…the recent outperformance.

When I began my Wall Street career nearly two decades ago, the first thing I was taught was to follow the leaders. Understanding the biggest trends is critical to knowing where the money’s flowing.

On every media channel they’ll harp on the sky-high price of crude. The commodity has surged on a 2-month basis, ramping about 30% from $70 bucks a barrel to nearly $90 recently.

But this latest surge isn’t anything new. In fact, we’ve been in a massive energy bull market for years.

On a 3-year basis, energy stocks have absolutely crushed the overall market.

The S&P Energy Select Sector (IXE) has gained 249% vs the S&P 500’s lift of 35%:

Source: FactSet

I’m big on following the money. And if you ask me, this is just one of several feathers in the energy bull’s cap… Energy’s winning big, and you should always bet on winners.

Let’s keep going…

Another reason to keep overweight energy stocks is due to their cheap relative valuation.

The forward P/E of the S&P 500 sits at 17.98… Not that exciting. Compare that with the forward 12-month P/E of 12.02 for energy stocks.

Even better, when you compare all major sectors, energy stocks have the lowest price to earnings… Half that of tech stocks:

So we have the money flows behind us… CHECK.

And valuations are attractive… CHECK.

Let’s now dive into the third reason to love the energy patch: Juicy yields!

Last week I did a solid dive into why dividend stocks offer stability when markets get rocky. No doubt those payouts will pay off.

On that note, energy stocks are uber attractive when you consider that they currently sport a hefty dividend yield of 3.53%. That’s more than double the S&P’s paltry 1.57% payout.

Energy’s yield is second only to utilities stocks:

Now that we have the yield kicker in our favor, let’s focus on the final reason to love Energy stocks right now.

If you recall back in late August I proved that seasonal tailwinds come in the 4th quarter. The doldrums of August and September are great times to pick up stocks unfairly sold as we head into the green part of the year: October — December.

The 4th quarter is one of the strongest periods for markets…including Oil & Gas names. Below shows you what I mean.

Since 2003, the Energy Select Sector SPDR ETF (XLE) gains 1.6% in October.

Not to be outdone, November climbs 2.3%:

The stars are aligning for energy stocks.

Not only are money flow tailwinds in your favor; valuations, juicy yields, and seasonal strengths give this group an A ranking in my book. You win the game of investing by stacking the odds in your favor. Right now, the way to do that is to buy energy stocks.

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