PXI: A Good Moment To Buy This Energy Momentum ETF (NASDAQ:PXI)

Power line silhouette with stormy sky and rising up arrow. Electricity price increase. Energy crisis in Europe. Growing electricity consumption for home and industry. Power generation shortage.

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The weakness in the oil price offers us a nice opportunity to buy an ETF that’s both in uptrend and oversold at the same time. This ETF is the Invesco DWA Energy Momentum ETF (NASDAQ:PXI). The valuation of the stocks in this ETF are on top of that very cheap. A golden combination.

The temporary weakness in the oil price is driven by recession fears (which are cyclical in nature) while the fundamental outlook for energy remains strong. Buy the dip!

The trend is up

The Invesco DWA Energy Momentum ETF isn’t the cheapest energy ETF (net expense ratio is 0.60%), but the past performance proves this ETF is worth your money. The graph below from the American Association of Individual Investors shows two things: PXI has been outperforming its peers for years and its recent performance is weaker. This creates an opportunity to acquire this energy ETF with a nice track-record.

Figure 1: PXI track record

Figure 1: PXI track record (AAII)

PXI uses a momentum strategy to select stocks and we like that approach. We also like to look at trends, both long (LT Trend) and short term (ST Trend).

When the LT trend is clearly up, we get a green light/colour. Vice versa, when the LT trend is clearly down, we see a red light/colour. In between the colour is orange.

When the ST trend is oversold (a value below 0), we get a green light/colour. Vice versa, when the ST trend is overbought (a value above 100), we see a red light/colour. In between the colour is orange.

You can see the evolution through time of both trends for PXI in Figure 2. The ribbon in the price-part of the chart shows the LT trend-colour, while the lower part of the chart shows the ST trend. We left out the orange colouring to avoid overloading the chart.

As you can see PXI has been in a clear uptrend for the past two years and the occasions it was oversold proved to be good moments to buy the ETF.

PXI return chart

Figure 2: Total Return Chart

The current weakness in the oil price offers us again such a nice opportunity.

The “DWA” in Invesco DWA Energy Momentum ETF stands for Dorsey, Wright & Associates. This investment firm was founded in 1987 and acquired by Nasdaq in 2015 and renowned for their philosophy of momentum or relative strength investing. This way they remove emotion and subjectivity from the investment process, and focus instead on an objective, rules-based process that can adapt to changing market dynamics.

PXI is based on the Dorsey Wright Energy Technical Leaders Index. PXI and its index are rebalanced and reconstituted quarterly.

The index provider “uses a proprietary methodology to analyze the relative strength of each security within the universe of eligible securities and determine a “momentum” score. In general, momentum is the tendency of an investment to exhibit persistence in its relative performance; a “momentum” style of investing emphasizes investing in securities that have had better recent performance compared to other securities.”

As far as we are concerned the trend is still up for PXI.

Figure 3: Trends

Figure 3: Trends (Yahoo! Finance, Author)

Year to date stocks are down, but the same cannot be said of energy stocks, (energy) commodities and metals & mining stocks.

Figure 4: Total return chart

Figure 4: Total return chart (Yahoo! Finance, Author)

We remain positive about the energy sector.

Energy sector

The main reason we remain positive about the energy sector is the chronic underinvestment. There is much talk about the transition to renewable energy. But that transition will not happen overnight. Research by the International Energy Agency shows that the demand for fossil fuels will be around for many years to come. The share of fossil fuels in the total energy supply will only drop to 60% by 2050 in the Stated Policies Scenario (STEPS), which is based on today’s policy settings.

Figure 5: Fossil fuel demand

Figure 5: Fossil fuel demand (IEA)

Despite the continued need for fossil fuels, the capex by energy companies is low.

igure 6: Fossil fuel capex

Figure 6: Fossil fuel capex (J.P. Morgan)

Figure 6: Fossil fuel capex J.P. Morgan

To quote Mike Wirth, the CEO of Chevron, in an interview with the Financial Times:: “Annual capital spending on oil and gas projects is now about half the rate seen in years before the pandemic, even though demand for the energy has continued to rise”.

The low capex is supportive of high(er) energy prices. In the meantime, the focus is more on leverage reduction and returning cash to shareholders.

Figure 7: Capex discipline

Figure 7: Capex discipline (Goldman Sachs)

Valuation

The valuation of energy stocks is so low that you can’t blame those companies because they prefer share buybacks above capital expenditures. The average P/E of the stocks in PXI is 5!

The 30 day SEC yield is 1.7%.

Figure 8: Valuation

Figure 8: Valuation (Invesco)

We already said that the index provider gives each security a momentum score and, after giving such a score, the index provider selects at least 30 securities with the highest momentum scores from the energy sector for inclusion in the index (and the ETF).

Currently there are 35 stocks in PXI. Each security is weighted by its momentum score, with higher scoring securities representing a greater weight.

Figure 9: Top 10 holdings

Figure 9: Top 10 holdings (Invesco)

Conclusion

We remain positive about the energy sector because of the chronic underinvestment. The low capex is supportive of high(er) energy prices the coming years.

The temporary weakness in the oil price, driven by recession fears, is offering a nice buying opportunity. Our preferred pick in this trending sector is the Invesco DWA Energy Momentum ETF. The valuation is low and the track-record is great. Buy the dip!

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