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Be Selective: Only One of Seven Energy Sub-Industries Carries Positive Fundamental Outlook

The S&P 500 declined 1.0% during the week ending 4/17/15, yet remained higher by 1.1% following Friday’s 20 point drop on Chinese regulatory actions, U.S. options expirations and a slight uptick in year-over-year core CPI. As a result of a pickup in inflationary concerns, in general, and a rise in oil prices, in particular, the S&P 1500 Energy sector was the sole price gainer among the S&P Composite 1500’s 10 sectors last week, rising 2.2% versus declines of between 0.4% for Materials to 2.0% for Industrials. In addition, less than 25% of the nearly 150 sub-industries in the S&P 1500 advanced in price with four of the top five price gainers coming from the energy and materials groups.

S&P 1500 Sector/Sub-Industry Price Returns: Week Ending 4/17/15

The natural question at this point is “Is it time to jump back into Energy?” Our one-word answer is “Selectively.” There are 101 energy sector stocks in the U.S. and Canada followed analytically by S&P Capital IQ equity analysts. Despite the significant sell-off during the past year, less than 1/3rd of these are worth buying, in our opinion. Specifically, 26 stocks are ranked 4-STARS (Buy), while only five carry 5-STARS, or Strong Buy, recommendations. What’s more, of the seven sub-industries within the S&P 1500 Energy Sector, Stewart Glickman, CFA, our Energy sector group head, has a negative outlook on Coal & Consumable Fuels, Oil & Gas Drilling, Oil & Gas Equipment & Services, and Oil & Gas Exploration & Production, while maintaining a neutral outlook on Integrated Oil & Gas and Oil & Gas Refining & Marketing groups. The only sub-industry in which he has a positive fundamental outlook is Oil & Gas Storage & Transportation.  As a result, we recommend that investors remain selective when venturing back into the oil patch.

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