Analysts follow as many as 20 stocks, most of which are rated ‘buys’. Of those buys, an analyst has one or two special favourites seen as most suitable for new buying. Seasonal analyst Don Vialoux picks two oil and gas exchange traded funds for a profitable ride on the energy sector in the coming months.
We have entered the best time of year for the energy sector, and 2017 is particularly promising for several reasons, so investors would do well to buy, says longtime seasonal analyst Don Vialoux.
Mr. Vialoux and son Jon are co-founders of seasonal investing websites timingthemarket.ca and equityclock.com. The duo previously managed a seasonality-based exchange traded fund together on behalf of Horizons ETFs Management as well.
The elder Vialoux explains that traditionally, the energy sector gains the most from the fourth week in January and stays strong until the first week of May. Going back 20 years, the TSX Energy Index has gained about 8.5 per cent on average during the high season.
“Nothing’s perfect in this world, seasonality doesn’t work all the time, but that’s what the average is.”
In technical terms, the TSX Energy Index as of the last days of January and first days of February did not yet appear to be performing well. The index has been on a downward trend and lacked strength compared to both the S&P/TSX Composite Index in Canada and the S&P 500 in the United States.
“You don’t want to buy it yet ’cause you want to have some kind of confidence on a technical basis that you’ve hit a bottom,” the analyst admits.
Oil and gas stocks will soon be ‘heating up’
However, a slate of positive fundamental factors, combined with the technical picture, greatly bolsters the case for an energy rally once stocks have cleared a bottom. “Here’s where it gets really interesting,” says Mr. Vialoux. (He advises looking for ETFs and related indexes to start heating up and then buying in.)
Most companies are just starting to report their full 2016 fourth-quarter results. Those of oil and gas stocks “will be exceptionally strong” when they do, the analyst asserts, because of dramatically higher oil and gas prices compared to a year ago.
“That’s what’s going to help the sector,” he says of the surprisingly large cash flow and earnings gains that he anticipates.
In the first quarter of 2016, natural gas prices averaged just US$1.80 per million British thermal units (BTUs). As of early February, the price stood at US$3.20.
Similarly, in the first three months of last year, the price of West Texas Intermediate crude oil hovered at about US$32 a barrel. At press time, the price was about US$54.
“The numbers actually get better on a year-over-year basis,” says Mr. Vialoux.
Higher oil and gas prices driving up production activity
The higher prices have inspired optimism among energy stocks in Canada and the U.S., leading them to invest in development and start up additional production.
Thus, when the time comes for energy stocks to report their 2017 first-quarter results, starting in early May, better news will follow the good news of last year’s fourth quarter, Mr. Vialoux argues.
Yet another factor that should boost 2017’s energy sector high-season performance over that of 2016 is the weather, the analyst says.
Whereas the El Niño current kept last winter warmer than usual, particularly in eastern North America, the U.S. National Oceanic and Atmospheric Administration predicts El Niño’s counterpart La Niña will come this winter, most likely causing the northern U.S. and southern part of Canada to be colder than normal and increasing precipitation.
“If you look at this weather situation, the primary use of heating in that area is by natural gas as opposed to heating oil,” says Mr. Vialoux. Because of that breakdown, he adds: “I have a tendency to favour what I call gassy stocks over what I call oily stocks.”
Nevertheless, the analyst predicts a profitable ride for the energy sector overall in the coming months, so he selects the iShares S&P/TSX Capped Energy Index ETF (TSX—XEG) as his first ‘best buy’ pick.
Mr. Vialoux says XEG, based on the TSX Energy Index, is the most heavily traded oil and gas ETF in Canada; about 3 million units trade hands daily.
For a more focused play, there is his second ‘best buy’ selection, the BMO Junior Gas Index ETF (TSX—ZJN). Mr. Vialoux notes that ZJN is “more oversold than the TSX Energy Index right now,” although he notes that the fund’s portfolio holds many oil stocks.
Even fears of a U.S. tax on Canadian oil and gas are less of a worry than one might think, though they have weakened recent energy stock prices; Mr. Vialoux says a new Republican president and congress historically cause turbulence in the markets for several months, but points out: “Things do turn out pretty good.”
Ironically, the new U.S. government could still boost oil and gas stocks even further. Remarking on a Republican administration’s early days, he says: “It is a period where markets don’t go up, except for energy.”
This is an edited version of an article that was originally published for subscribers in the February 24, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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