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Dec. 26, 2019, 9:39 a.m. EST

Here’s why a rough patch for battered oil stocks may be about to come to an end in 2020

Critical information for the U.S. trading day

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By Barbara Kollmeyer, MarketWatch


TechnipFMC
Oil-services stocks. Dogs no more?

Investors may be ready to squeeze some fresh records out of Wall Street equities in the countdown to 2019’s finish.

Stock futures are rising as the rest of a short holiday trading week gets under way. To be sure, we have come some ways since last year’s Christmas Eve trading nightmare, with the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.52%  up nearly 35% and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.45%  up by about 28% in the year to date with just four full trading sessions left in the year.

But not all stocks and sectors have been having such a terrific time of it, which brings us to our call of the day , from Crescat Capital’s global macro analyst Octavio ‘Tavi’ Costa, who says opportunity may be knocking for one sector that’s been down in the dumps for a while.

Oil-service stocks have “never looked so cheap,” Costa said in a recent tweet.

Costa shows us a chart highlighting one measure of value — the price-to-sales ratio, which is calculated by dividing a company’s market capitalization by total sales. He says that ratio is now below previous periods over the past 20 years that preceded major bottoms for the oil-service sector.

“Commodities are historically undervalued, plenty value to be found,” he adds.

Costa’s call follows a particularly rough patch for oil-services companies, as big producers have scaled back on new projects. Indeed, J.P. Morgan analysts told clients earlier this month that the sector is facing its third straight year of negative 40% underperformance, compared against the overall stock market.

Other analysts have expressed some bluishness about beaten-down oil, including Deutsche Bank analyst Chris Snyder. Last month, he made the case that a rebound in U.S. shale exploration in the second half of 2020 should help companies that service the big energy names.

Snyder recommends companies that tap into international oil development, such as Schlumberger /zigman2/quotes/201012972/composite SLB +1.47%  and TechnipFMC /zigman2/quotes/207530935/composite FTI +5.35% , over those that focus more on the U.S. side — Transocean /zigman2/quotes/208905612/composite RIG 0.00%  and Patterson-UTI Energy /zigman2/quotes/204120302/composite PTEN +3.23% .

oil_vs_SPX

Another way to play the sector, is the iShares U.S. Oil Equipment & Services ETF /zigman2/quotes/206923360/composite IEZ +1.07%  and the Invesco Dynamic Oil & Gas Services ETF /zigman2/quotes/200133030/composite PXJ +0.43%  are a couple of exchange traded funds that tap into this sector.

It is important to note that headwinds for the sector could be severe, despite the optimism, with J.P. Morgan analysts remaining skeptical about 2020 and extending downside risks into 2021.

The market

The Dow /zigman2/quotes/210598065/realtime DJIA +0.36%  , S&P 500 /zigman2/quotes/210599714/realtime SPX +0.45%   and Nasdaq /zigman2/quotes/210598365/realtime COMP +0.52%   are modestly higher, while oil /zigman2/quotes/209723049/delayed CL00 -1.43%  and gold /zigman2/quotes/210034565/delayed GC00 -0.16% are up. European markets are closed for one more day, while Asian markets /zigman2/quotes/211618636/realtime XX:ADOW +2.31% /zigman2/quotes/211618636/realtime XX:ADOW +2.31% finished mostly higher.

Read: Here’s when markets will be closed for the Christmas and New Year holidays

/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
10,207.63
+53.00 +0.52%
Volume: 3.69M
July 2, 2020 5:16p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,130.01
+14.15 +0.45%
Volume: 2.33B
July 2, 2020 5:19p
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/zigman2/quotes/201012972/composite
US : U.S.: NYSE
$ 17.98
+0.26 +1.47%
Volume: 10.30M
July 2, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
2.78%
Market Cap
$24.95 billion
Rev. per Employee
$328,150
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/zigman2/quotes/207530935/composite
US : U.S.: NYSE
$ 7.28
+0.37 +5.35%
Volume: 6.63M
July 2, 2020 4:02p
P/E Ratio
N/A
Dividend Yield
1.79%
Market Cap
$3.26 billion
Rev. per Employee
$339,268
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/zigman2/quotes/208905612/composite
US : U.S.: NYSE
$ 1.84
0.00 0.00%
Volume: 15.65M
July 2, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.13 billion
Rev. per Employee
$448,507
loading...
/zigman2/quotes/204120302/composite
US : U.S.: Nasdaq
$ 3.36
+0.11 +3.23%
Volume: 5.57M
July 2, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
2.38%
Market Cap
$626.65 million
Rev. per Employee
$415,875
loading...
/zigman2/quotes/206923360/composite
US : U.S.: NYSE Arca
$ 8.48
+0.09 +1.07%
Volume: 116,107
July 2, 2020 4:00p
loading...
/zigman2/quotes/200133030/composite
US : U.S.: NYSE Arca
$ 2.35
+0.01 +0.43%
Volume: 31,811
July 2, 2020 4:00p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
25,827.36
+92.39 +0.36%
Volume: 350.29M
July 2, 2020 5:19p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,130.01
+14.15 +0.45%
Volume: 2.33B
July 2, 2020 5:19p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
10,207.63
+53.00 +0.52%
Volume: 3.69M
July 2, 2020 5:16p
loading...
/zigman2/quotes/209723049/delayed
US : U.S.: Nymex
$ 40.07
-0.58 -1.43%
Volume: 56,650
July 3, 2020 9:39a
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/zigman2/quotes/210034565/delayed
US : U.S.: Nymex
$ 1,787.20
-2.80 -0.16%
Volume: 31,169
July 3, 2020 9:38a
loading...
/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
3,183.71
+71.86 +2.31%
Volume: 0.00
July 3, 2020 9:48a
loading...
/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
3,183.71
+71.86 +2.31%
Volume: 0.00
July 3, 2020 9:48a
loading...
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