×

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.

Read More The biggest mutual fund bets on Tesla Motors

"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."

Read MoreThese hot stocks could surge as the economy sputters

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."


Want to be a part of the Trading Nation? If you'd like to call in to our live Wednesday show, email your name, number and a question to TradingNation@cnbc.com.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect