Key points:
Stocks nearer highs have better fundamental characteristics than those further off highs. While not surprising necessarily, the linear nature of the distribution across several key metrics is interesting nonetheless.
Author: Kenley Scott
Kenley Scott is a senior equity analyst and sector strategist covering the APAC region and the Energy sector. He is a member of the Global Focus List Committee, which approves all equity recommendations for developed, emerging, and frontier markets. Kenley also writes the Global Sector Summary, part of the Sector Strategy service, which identifies emerging sector strength and weakness across 46 countries every week. After working as a commodities broker, Kenley joined the firm in July 2006. He has a B.S. in Statistics from the University of California, Riverside and also holds a Series 65 securities license.
May 02, 2019 – Energy Sector Booms and Busts
In this week’s webinar, Director, Research Analyst Kenley Scott will examine what’s driving the U.S. Exploration and Production industry’s huge lag versus crude prices, which standout global oil and gas producers you should be watching, and what to know about solar’s re-emergence in the U.S.
Global Energy Sector
Some highlights from this report:
Crude oil prices are near year-to-date highs as a fresh round of OPEC cuts take effect.
Market still not bullish on future prices, as futures market remains in contango.
Despite higher oil prices, U.S. producers have not performed well.
Could be a catchup trade should prices stay elevated, but underperformance a disappointment (same as 2018).
Global producers ( Norway, Russia ) with ultra low costs of operation are the standouts ( DNO.NO, AKEP.NO, TAF.RU, NTV.RU ).
Clean Energy is now a steady, investable theme.
Wind/solar producers and equipment providers ( NEE/NEP, DEN.DK, ENAP.TH, PEGI, TEN.GR, VEW.DK ).
U.S. and China solar producers/equipment makers experiencing a cyclical recovery.
Global Sector Commentary
Key points:
With U.S. dollar strength ( break to two-year highs this week ), some pressure on global ETFs ( traded in U.S. dollars ). The Stoxx 600 ( IEV ), Emerging ( EEM ), and APAC ( AAXJ ) ETFs typically suffer when the U.S. dollar strengthens.
Of the three areas, developed Europe local markets, specifically growth stocks with global exposure ( weaker local currency beneficiaries ), look more attractive. Below are our actionable Focus List stocks from Europe that fit this profile.
Global Sector Commentary
Attached is the latest Global Sector Commentary from Director, Research Analyst Kenley Scott.
Health Care typically corrects with the market. In the past 30 years, there is one major exception.
From January 1992 to August 1993, Health Care lost 35% while the S&P 500 gained 8% as President Clinton pushed for healthcare reform.
All industry groups sold off when the conversation began to pick up, but managed care (insurance) rose later as the conversation moved from a universal health care argument to a mandate for coverage.
Currently, the sector is 13% off highs, while indices are back within 1% of highs.
We will be watching closely over the coming weeks to see if weakness spreads to other growth areas, but because we are seeing rotation into other sectors (industrials, cyclicals, semis, etc), market health is still generally intact.
Global Sector Commentary
Key points:
There have been many successful IPOs this year. The average change from pricing is 34%.
The past two weeks have seen five especially successful IPOs:
Jumia Technologies ( JMIA ), Pagerduty ( PD ), Tufin Software Tech ( TUFN ), Silk Road Medical ( SILK ), and Tradeweb Markets ( TW ).
These line up roughly with the winners of the past year, given very strong revenue growth and big day-one gains. Their market caps are more mixed, with PD and TW well above the median winner.
Global Sector Commentary
Key points:
- The iShares MSCI Emerging Market ETF ( EEM ) broke out of a two-month range this week and into five-month highs.
- Relative strength versus the S&P 500 also looks to be resuming an uptrned that began in October 2018 but has stalled for two months.
- Stock participation is strong, and there are many actionable names, with higher weighting coming from the Financial, Material, Tech, Staple, and Health Care sectors.
Global Sector Commentary
Key points:
- The O’Neil Basic Material sector has the best performance of all 11 sectors over an eight-week, 13-week, and 26-week forward basis once the yield curve (10-year/three-month) inverts. It has second best performance over the forward 52-week period, behind Energy. Utility is in the bottom half in each period.
- Currently, Utility has a large lead over Material over the trailing one-year period (best versus worst sector over the time frame). That spread reached more than 30% recently, an historic extreme (see below). We think the potential for reversion is strong and recommend looking for ways to take advantage.
- One way would be a pair trade of short the Utility ETF ( XLU ) versus long the Material ETF ( XLB ). Another is to pick favored Material stocks to pair against weaker Utility names.
- On the latter, a few Material names that screen well currently are Air Products ( APD ), Quaker Chemical ( KWR ), Barrick Gold ( GOLD ), Linde ( LIN ), PPG Industries ( PPG ), and Ingevity ( NGVT ). A handful of weaker Utility names are Edison Intl ( EIX ), South Jersey Indsutries ( SJI ), Avangrid ( AGR ), and National Grid ( NGG ).
Global Sector Commentary
Key points:
- 10-year – three-month yield curve inversion sparks Friday selloff.
- Given the tight bunching of sectors year-to-date, this could be the beginning of much more divergence.
- All sectors up at least 9% year-to-date (max 20%).
- A normal year has a dispersion of 40% between best and worst sector.
- Taking a look at the worst industry groups during today’s selloff, many were already showing signs of weakness. Most are from interest-rate sensitive Financials or economically-sensitive Cyclicals, Equipment, or Transport. These are areas to continue avoiding.
Global Sector Commentary
Key points:
Recent global economic data has continued to be weak, as evidenced by the OECD’s declining GDP projections.
We believe that investors have responded to this slower global growth outlook by increasing exposure to companies with strong secular growth profiles, as opposed to cyclical ones. If we examine the leading O’Neil Industry Groups over the last month, we see that many of them are in the long-term growth areas of Technology and Healthcare, including Software, Semiconductors, Computer Networking, Telecom, and Medical Services.
The U.S. market has been moved back into a Confirmed Uptrend. The S&P 500 and Nasdaq cleared above longer-term resistance on Friday, closing at the highs of the session.
Seven sectors are now trading above their respective 200-DMA after the strong rally this week. Technology continues to lead, with multiple industry groups, including Software and Semiconductors, back under accumulation.
Actionable Focus List ideas: Broadcom (AVGO), Cabot Microelectronics (CCMP), Coupa (COUP), Dexcom (DXCM), Edwards Lifesciences (EW), Fiserv (FISV), Fleetcor (FLT), Freshpet (FRPT), Global Payments (GPN), Hubspot (HUBS), Intuitive Surgical (ISRG), Microsoft (MSFT), Pagseguro Digital (PAGS), Palo Alto Networks (PANW), Saleforce.com (CRM), Starbucks (SBUX), Worldpay (WP), World Wrestling Entertainment (WWE), Zoetis (ZTS).
