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Demand for energy supplies ‘increased significantly’ (NYSEARCA:XLE), says analyst Truist


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Investors seem to ready to start buying energy stocks (NYSEARCA:XLE) again as earnings begin to rise, looking to increase their share in the sector on the back of healthy free cash flow, Truist analyst Neal Dingmann said on Monday, advocating the move. because it is still cheap and tends to have a positive income adjustment bias.

After talking to a number of E&P firms as well as a number of investors, Dingmann said he believes “demand for energy stocks is about to increase significantly” when the earnings report comes out.

Dingmann said his confidence comes after “on the road widely” with six E&P firms – (APA), (CPE), (ESTE), (MTDR), (MUR) and (NOG) – all rated Buy at Truist.

The analyst expects about a third of the companies he manages to report Q3 free cash flow below Q2 levels, but FCF yields will still be among the highest of any group.

SPDR Energy Select Sector ETF (XLE) has gained 19.2% over the past three months and 47.3% year-to-date, compared with the S&P 500, which has lost 4.9% over the past three months and 22.9% for the full year.

But even as a utility stock (NYSEARCA:XLU) rose on Monday, Truist analysts say it still not a good time to buy utility stockscut the industry’s outlook to Neutral from Overweight, citing mixed fundamentals and valuations as well as the recent weakness in technical trends.

SPDR ETF Sector Select Utility (XLU) has rallied to ~$77 per share three times this year, only falling victim to selling pressure at that level has sent prices down; The ETF is currently at ~$63 after falling from $78 in mid-September to a year-to-date low of nearly $61 in early October.

Even after the recent drop in utility stock prices, the Utilities Select ETF’s dividend yield is still a meager 2.85%, not enough to attract buyers as the 10-year U.S. Treasury bond yields favor yield ~ 4%.

Utilities (XLU) will rebound because of “two demand-related catalysts: global warming and greater EV adoption, as well as the Biden administration’s ability to pass clean energy and infrastructure legislation “, Michael Fitzsimmons wrote in an analysis published in Seeking Alpha.

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