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Pro Analysis

Buy the dip in energy stocks because they are cheap and oil should stay above $50, Jefferies says

Oil workers in the Permian Basin outside Midland, Texas
Brittany Sowacke | Bloomberg | Getty Images
Oil workers in the Permian Basin outside Midland, Texas

Investors should buy energy stocks due to the sector's cheap valuation and improving sales growth this year, according to Jefferies, which raised its rating on the sector to overweight from market weight.

The S&P Energy Select Sector index and oil prices are down 7 percent this year as of midday Thursday. But WTI crude did jump back above $50 a barrel in trading Thursday following a more than 4 percent comeback this week.

"We think the pullback in crude oil and even natural gas has created an opportunity for energy to outperform going forward," strategist Steven DeSanctis wrote in a note to clients Thursday. "OPEC continues to indicate that they are going to hold to production cuts and with demand and supply coming into balance in the back half of the year, oil prices should head higher."

In another move, the strategist lowered his rating on industrials to market weight from overweight.

The industrial sector "has had a big run since last February, it looks expensive, and the Trump bump is wearing thin and this group benefited from the push," he wrote. "We think the infrastructure spending that the market was very excited about last year may take much longer to deliver, and thus these stocks have gotten ahead of themselves."