After you receive this alert, we will buy 295 shares of Energy Select Sector SPDR Fund (XLE) at or near $90. Following the trade, XLE will account for 0.75% of the portfolio.
Earlier this morning we shared EU leaders reached an agreement to ban 90% of Russian crude by the end of the year and Shanghai authorities announced they would work to ease "unreasonable" Covid rules starting this week. We also shared that gasoline stocks are in dire shape and odds are gas prices will continue to move higher as a result, in our view keeping inflation at elevated levels. All of this points to further increases in both demand and prices for oil, gasoline and other forms of energy compared to recent expectations.
This is prompting us to get off the sideline and initiate a starter position in XLE shares, which similar to our position in the First Trust Nasdaq Cybersecurity ETF (CIBR) , affords the portfolio wider spread and very liquid exposure to the energy sector (oil, gas, and consumable fuels) rather than owning one particular stock. This is in keeping with our strategy to selectively use a few ETFs in either a strategic or tactical fashion for the portfolio. XLE's 21 holdings span Chevron (CVX) , Exxon Mobil (XOM) , ConocoPhillips (COP) , Marathon Petroleum (MRO) , EOG Resources (EOG) and brings with it a $2.80 per share forward dividend.
Earnings expectations for the basket of companies have been moving higher over the last several weeks as oil prices in particular look to remain at elevated levels, which should afford more than favorable year over year revenue and EPS comparisons for the aggregate constituents. Aggregate consensus expectations for the ETF's two largest holdings, Chevron and Exxon Mobil, look to soar 90% this year while those for 2023 have moved higher in recent months as well. Today's news likely means we will either see oil prices inch higher or at a minimum remain at elevated levels for longer than previously expected. In both cases the bodes well for further positive EPS revisions for XLE's basket of companies.
With XLE shares moving past their 52-week high on this morning's news, we are adding them to the portfolio with a Two rating even though our price target of $98 offers 10% upside. As oil prices either move higher or remain near current levels for a sustained period of time, we will look to revisit that price target. In keeping with a Two rating, we will look to build out the XLE position either on pullbacks or on signs our price target needs to be adjusted higher.