Energy stocks are off to a bumpy start this year, but their recent sell-off may be overdone, said one strategist.
“The investors who are selling energy might be in some ways overreacting to some of the concerns about economic activity going forward,” SS&C ALPS Advisors chief ETF strategist Paul Baiocchi told Yahoo Finance Live. (Video above)
He added, “Energy companies – if you look at those within XLE (XLE), for example – are still extremely cheap just on a valuation basis…Look at the top of the food chain in energy, these companies have free cash flow yields in excess of 10%. So valuations have actually come down despite having rallied 100% plus over the course of the past couple of years.”
On Tuesday XLE rebounded following a heavy recent sell-off. The energy sector is down 8% year-to-date, after rising 57% in 2022.
Oil prices have been severely hit recently. Brent (BZ=F) crude is hovering round $75 per barrel, after declining almost 10 percent last week.
West Texas Intermediate (CL=F) also slid more than 10% over a span of five days ending March 17th. WTI is currently trading below $70 per barrel.
Lenders holding crude contracts may have also contributed to the heavy selling.
“I would suspect that banks might be selling crude oil futures on behalf of their clients like hedge funds who were long oil. In addition there may be others selling oil as they believe the issues in the banking sector lead to a recession negatively impacting oil demand,” Andy Lipow of Lipow Oil Associates told Yahoo Finance last week.
The recent pullback may also be overdone, said Baiocchi.
“The reality is global energy markets are still very tight as a result of the Ukraine conflict and…there has been underinvestment in production globally,” he said.
The strategists see opportunity in the sector as the U.S and other countries transition towards green economies.
“The reality is that investors who want a position for that probably need some combination of legacy energy exposure along with renewable energy exposure to position for that, perhaps in addition to carbon credits exposure and even raw materials exposure, lithium, nickel, cobalt, et cetera that goes into these things,” said Baiocchi.
Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre