Should you buy energy ETFs ahead of Q1 earnings?

 

The recent surge in oil price has pulled energy stocks out of doldrums with the S&P 500 energy index now far from correction territory, where it languished for almost two months. This has made the case stronger for the broad energy sector ahead of Q1 earnings.

As a result, the ultra-popular ETFs Energy Select Sector SPDR XLE, Vanguard Energy ETF VDE, iShares U.S. Energy ETF IYE and Fidelity MSCI Energy Index ETF FENY surged more than 11% each over the past month.

The upside has been supported by strong Q4 earnings expectations. This is especially true as total earnings for the sector are expected to be up 61.2% from the same period last year on 15.9% higher revenues.

Let’s delve into the earnings picture of two oil biggies, Exxon Mobil XOM and Chevron CVX, which dominate the above-mentioned funds’ portfolio and have the power to move the funds up or down in the coming days. Both firms are slated to release their earnings before the market opens on Apr 27, and collectively make up for 39.6% for XLE, 36.3% for IYE, 34.9% for FENY and 35.7% for VDE.

According to our surprise prediction methodology, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP is likely to come up with an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

What’s in the Cards?

Exxon Mobil has a Zacks Rank #3 and an Earnings ESP of -4.38%, implying that a beat cannot be predicted this quarter. The stock saw a negative earnings estimate revision of a couple of cents over the past 30 days for the to-be-reported quarter and delivered negative earnings surprise of 1.69% on average over the last four quarters. However, its earnings are expected to grow an impressive 24.21%. The stock has a solid Value and Momentum Score of B and A, respectively, and a Growth Score of D.

Chevron has a Zacks Rank #3 and an Earnings ESP of 0.00%. The company is expected to see modest earnings growth of 2.81% year over year for the to-be-reported quarter and delivered an average positive earnings surprise of 7.41% in the last four quarters. However, the stock has witnessed downward earnings estimate revision of couple of cents over the past 30 days. The stock has a solid Growth Score of A, and a Value and Momentum Score of C each.

Conclusion

The duo has a favorable Zacks Rank but saw a downward earnings estimate revisions. Analysts decreasing estimates right before earnings — with the most up-to-date information possible — is a bad indicator. However, the above-mentioned ETFs have a Zacks ETF Rank #3, suggesting some room for upside in the near term as these funds could encounter the shocks from any of the major components in their holdings.

SPDR-EGY SELS (XLE): ETF Research Reports

ISHARS-US EGY (IYE): ETF Research Reports

FID-ENERGY (FENY): ETF Research Reports

VIPERS-ENERGY (VDE): ETF Research Reports

Chevron Corporation (CVX): Free Stock Analysis Report

Exxon Mobil Corporation (XOM): Free Stock Analysis Report

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Zacks Investment Research

Symbols: CVX FENY IYE VDE XLE XOM
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