Energy stocks to own for the next oil rally – Magic Post

Every now and then, markets line up to offer investors the perfect way to enter a particular sector, with all the tailwinds coming from other asset classes. Today, there are tailwinds brewing in the spreads between value stocks and growth stocks, which fell to multi-decade lows to show investors a potential shift in the market over the coming months.

When investors plot the difference between prices in iShares S&P 500 Value ETF NYSEARCA: Yes And the far corresponding to iShares S&P 500 Growth ETF NYSEARCA:IVWThey will note that today’s level will imply that value stocks are now a massive buying opportunity, but there is a larger indicator at play in the energy sector.

As a mirror image of oil prices, the value spillover into growth and the recent sell-off would call for a significant rise in oil prices. This is why investors need to start looking at stocks in the oil value chain, e.g TRANSOCEAN LIMITED New York Stock Exchange: Reg At the top of the value chain, Occidental Petroleum Company New York Stock Exchange: Oxy Like a Warren Buffett pick, and finally, a pick from the bottom of the market Exxon Mobil Company New York Stock Exchange: Gold.

Why do declining value versus growth spreads indicate potential rises in oil prices?

Growth stocks have significantly outperformed value stocks, taking their spread (the performance gap between the two) to its lowest level in several years. This dynamic has important implications for the economy and the energy sector.

One possible outcome is that growth stocks could face a significant pullback, triggering a “flight to safety” across the broader market. In such scenarios, assets such as oil and gold often see rises. With gold already approaching new highs, this could signal an impending rise in oil prices as part of the broader commodities cycle.

Transocean Stocks: First in Line for Earnings Growth

Now that Transocean stock is trading just 53% off its 52-week high, investors may see an opportunity to buy it and take advantage of potential upside in the broader sector.

That’s why Wall Street analysts are now recognizing the inherent upside in this stock. They set a consensus price target of $6.25 today, calling for upside of up to 70% from where it is trading today. However, these analysts aren’t the only ones ready to express optimism about Transocean stock.

Institutional investors from Primecap Management decided to boost their holdings in Transocean shares by 0.4% from November 2024, bringing their net position to a high of $239.4 million today or a 6.4% ownership in the company. The move gives investors a measure of optimism in this name for the upcoming rise in energy names.

Since Transocean leases equipment to major oil producers before they start new drilling operations, it is set to get its money first up the value chain, justifying the bullish numbers behind the stock at the moment. Wall Street analysts are also forecasting net earnings per share (EPS) for the next 12 months, up from today’s net loss.

Why did Warren Buffett justify buying Occidental Petroleum shares?

Compared to the rest of the energy sector, Occidental Petroleum shares are trading at a price-to-earnings ratio of 12.1 times today, a significant discount to the sector’s average valuation of 16.9 times today. Any stock can become cheap, but Buffett saw enough reason to buy this stock because of its profitability.

Occidental Petroleum’s financial statements show that the company achieved 14.9% return on equity (ROE) rates.

For retail investors, this means a better opportunity, considering that the stock is now below the levels at which Buffett started buying it, especially since it was sold 53% off its 52-week high.

Even short sellers have decided to stay away from this stock, and its potential upside is starting to show, as Occidental Petroleum’s short interest has fallen by as much as 3.1% over the past month alone, a sign of bearish capitulation.

Institutional capital flows into Exxon Mobil stock

As of late November 2024, Franklin Resources has decided to increase its investment in Exxon Mobil stock by up to 16.3%, bringing its net holdings to a high of $3.9 billion today. In addition to these institutional investors, some Wall Street analysts have decided to bolster their views on the stock.

Those from UBS Group, in particular, reiterated their buy rating on Exxon Mobil shares, this time setting a $147 price target for the company.

To prove this view correct, the stock would need to rise as much as 36% from where it is trading today, let alone a new high for the year.

Even if the shift from growth stocks to other value stocks, like these energy plays, takes some time, Exxon Mobil shares offer shareholders a payout of $3.96 per share today, or an annual dividend yield of 3.7%.

Before you consider Transocean, you’ll want to hear this.

MarketBeat tracks the highest-rated and best-performing research analysts on Wall Street and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches up… and Transocean wasn’t on the list.

While Transocean currently has a “Hold” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here

Unlock your free copy of MarketBeat’s comprehensive guide to stock investing and discover which cannabis companies are poised to grow. Plus, you’ll get exclusive access to a daily newsletter featuring expert stock recommendations from top Wall Street analysts.

Get this free report

Like this article? Share it with a colleague.

The link has been copied to the clipboard.