This year's worst-performing sector is also the most expensive

  • The energy sector is the market's biggest laggard this year.
  • It's also has the highest valuation based on its forward price-to-earnings ratio.
  • Some strategists see further downside for the sector and for crude oil, to which it is closely tethered.

Talk about low-energy stocks.

The energy sector has the highest valuation in the S&P 500, even though it's the market's worst performer this year.

WTI crude oil has lost 10 percent this year and the sector is down nearly 11 percent, and some strategists see further downside.

"I do think it's going to be a challenging road for oil, and we seem to just continue to be on a roller coaster that bottoms at $40, and tops out at $55. And we can't seem to get off of this roller-coaster ride," Gina Sanchez, CEO of Chantico Global, said Tuesday on CNBC's "Trading Nation."

At nearly 28 times forward earnings, the sector's forward price-earnings ratio is significantly above the second most richly priced sector, consumer discretionary. Its trailing price-to-earnings ratio is 33 times, second only to real estate among the 11 sectors.

This high price as compared with expected earnings comes despite a major comeback for energy profits; the sector is on track to report 790 percent net income growth this quarter from the first quarter of 2016, according to FactSet estimates. Energy is also reporting the highest year-over-year earnings growth of any sector, according to FactSet.

Buying energy stocks is difficult at this juncture given how much the price of oil has vacillated this year, Sanchez said.

Crude oil has bounced around a range of roughly $47 to $56 a barrel, and in Tuesday trading dove beneath its 200-day moving average to its lowest level in five weeks as higher output in the U.S., Canada and Libya pressured the price. This comes even as Russia and major OPEC member countries have lowered production.

Oil prices just "aren't cooperating," Sanchez said. "We are probably going to see OPEC cuts hold, but we are seeing less and less compliance, and that's going to be a challenge."

One popular exchange-traded fund that tracks energy stocks, the XLE, has fallen this year along with the sector. It closed at 67.31 on Tuesday.

"It's not pretty here in the short term," Rich Ross, Evercore ISI's head of technical analysis, said Tuesday on "Trading Nation," examining a chart of the ETF.

However, Ross said, absent a break below 65 — a key level of support the XLE held last year — he wouldn't write off energy and crude because he is more optimistic about fundamentals than he is of the charts.

Sanchez said she could become more bullish.

"Geopolitical tension tends to buoy the price of oil; in fact, it will cause oil price spikes. That's certainly nothing that anybody's hoping for," but it would be something that she is watching when considering the future of energy stocks and oil.

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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.

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.

Follow Michael Santoli on Twitter @michaelsantoli

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