Editor’s note: This column is part of our Best Stocks for 2015 contest. David and Michael Fabian’s pick for the contest is the iShares U.S. Oil Equipment & Services ETF (IEZ).
As we review our pick in the InvestorPlace Best Stocks of 2015 contest at the midpoint of the year, the iShares U.S. Oil Equipment & Services ETF (IEZ) is trending in the middle of the pack.
While not as exciting as the micro-cap leaders in Ambarella Inc (AMBA) and Rave Restaurant Group (RAVE), there are several factors that suggest this ETF may be consolidating for another move higher.
The Fundamental Picture
As we noted in our initial treatise, the fundamental premise for selecting IEZ was built upon the notion that oil prices and by extension oil stocks were at an oversold state as we entered the year. After all, oil and gas servicers typically exhibit the most erratic price movements in the entire energy sector; especially in relation to the underlying commodities.
A rebound in the price of crude and natural gas should ultimately set these stocks on a course to recover their losses and provide a fund such as IEZ with plenty of upside.
The first quarter proved to be a rocky and volatile period for the United States Oil Fund (USO), which has subsequently resolved itself to a more predictable uptrend over the past three months.
If oil prices continue on the current path higher or remain in a sideways trend, a more stable picture of the energy space will emerge and likely help support the fundamentals for oil services companies.
In fact, after examining recent price fluctuations, IEZ has slightly underperformed the sideways price movement of oil, which could indicate weak-handed bottom-feeders are losing interest. From a contrarian point of view, this bodes well for a reemergence of its prior uptrend, and new investors could also be presented with a relatively good entry point near current levels.
The Technical Picture
The biggest concern on the technical front is the downward-sloping 200-day moving average on IEZ. The ETF has yet to reclaim its long-term trend line and has been gently sliding lower over the last six weeks.
While the short-term chart may look troubling for IEZ, a convincing break above this key moving average may provide an additional impetus to the upside.
The Bottom Line
Although the equity market has not proven itself to be very fruitful during the first half of 2015, we believe IEZ is a diversified subset of stocks that will perform well as commodity prices rebound.
This ETF is certainly for investors with a more aggressive risk tolerance who don’t mind the added volatility and patience that may be required before a new uptrend is established.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management.
Michael Fabian is Managing Partner and Chief Investment Officer of FMD Capital Management.
To get more investor insights from FMD Capital, visit their blog. Learn More: Why I love ETFs, And You Should Too
