PXE: Moving From Buy To Hold After A 33% Gain (NYSEARCA:PXE)

Thesis

We covered this name in the beginning of July in order to offer investors a more dynamic alternative to the static S&P Oil & Gas Exploration & Production ETF (XOP). The Invesco Dynamic Energy Exploration & Production ETF (NYSEARCA:PXE) is up more than 33% since our article and outperformed XOP significantly during the time period as well:

Energy stocks have rallied back from the June lows despite a weaker than expect environment for WTI Oil which is down almost -20% in the past three months. Oil & Gas shares correlated highly with the risk-off sentiment in June rather than trading on fundamentals. From a fundamental standpoint oil is still at a level which translates into significant free cash flow generation for the underlying businesses which are doing all the right things such as paying down debt, reducing leverage and purchasing back shares at low P/E ratios.

The market, however, does not go up in a straight line and the rally is now entering overbought territory:

We can see that the 1-year RSI level is at the overbought 70 level threshold and historically this has been followed weaker prices in the near term. We believe that while long term fundamentals are paramount, near-term stocks do not move up in a straight line but in waves. We are of the opinion that we are currently witnessing the end of a great bear market rally which is going to be followed by more weakness in the general equity market. Oil & Gas equities, despite their fundamentally sound backgrounds, will not be able to escape the gravity of that move. We are happy with the 33% gain here and feel the best approach to trading PXE is to move to neutral and wait for a better entry point. We are therefore on Hold for PXE.

Performance

PXE shows an outperformance of over 4% over XOP and more than 12% over Energy Select Sector SPDR ETF (XLE):

Since our article in the beginning of July, energy stocks have rallied with exploration & production names outperforming. Year to date, the picture is similar, with PXE generating a return almost 50% higher than the one exhibited by XLE:

Holdings

The current top names in the ETF are as follows:

Occidental Petroleum (OXY) has been featuring heavily in the news as of late by being a Warren Buffett favorite, with the famous investor continuing to accumulate shares in the name. Valero Energy (VLO) has continued to benefit from record refining margins, with the stock trading well above pre-pandemic highs.

The geographic concentration paints a U.S.-centric exposure:

The sub-industry split outlines the main components of the ETF:

While pure Oil & Gas E/P companies provide the bulk of the exposure, the fund also runs refining margins risk via its Oil & Gas Refining & Marketing companies. We have seen this sector outperform this year based on historic high refining spreads.

Conclusion

PXE is an ETF that will normally invest at least 90% of its assets in Oil & Gas companies based on price momentum, earnings momentum, management action and quality. PXE basically pursues a momentum factoring approach when compared with the much better known name in the sector, XOP. The fund is up more than 33% since our Buy rating in the beginning of July and is now entering overbought territory. We are of the opinion that we are currently witnessing the end of a great bear market rally which is going to be followed by more weakness in the general equity market.

We are happy with the 33% gain here and feel the best approach to trading PXE is to move to neutral and wait for a better entry point. We are therefore on Hold for PXE.