Why energy investors can’t relax just yet

Energy stocks continued a five-day winning streak on Tuesday, with the S&P 500 energy sector hitting a three-month high. However, some investors are still advising caution around the space, despite its impressive gains.

Gina Sanchez of Chantico Global said energy prices could see a short-term boost on continued concerns about production in Libya and Brazil, as well as falling rig count in the U.S. Energy stocks such as Chevron and Exxon Mobil have also benefited from beating extremely low earnings expectations, she said.

Energy has been the biggest drag on S&P 500 third-quarter earnings, projected to drop more than 60 percent compared to one year ago. However, it's this beaten-down sector that's reporting the largest upside difference between actual and estimated earnings, as well as actual and estimated sales, according to FactSet.

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"A lot of pessimism was leading to a lot of positive surprises," Sanchez said Tuesday on CNBC's "Power Lunch."

However, she said the long-term outlook is still bearish, given the massive supply glut.

"Maybe there's a little bit of a mixed signal, but the overarching view is that OPEC is still pumping like crazy and we are well, well, well supplied," she said.

Meanwhile, the overall earnings outlook for the energy sector ETF (XLE) is still bleak, according to Erin Gibbs of S&P Investment Advisory. Earnings per share are expected to fall 24 percent for the next 12 months, she said.

"It's getting a lot closer to all of the analyst estimate prices, [but] we really haven't seen the energy prices revised up," Gibbs said Tuesday. "We're still seeing major negative earnings contractions over the next 12 months."

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Looking at the price-to-book ratio for the XLE, which compares the stock price to a company's book value and assets, Gibbs said the ETF could be overvalued. XLE's price-to-book ratio has failed to rise above 1 for the past year and is currently trading about 0.9, she said. Gibbs recommends waiting for the ratio to drop below 0.85 before buying.

"We're really at one of those levels of resistance that tops the price-to-book values that we've seen for most of this year," she said. "Given where we see supply and demand, I just don't see the catalyst for it to break further forward and above that 0.9 price-to-book."

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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