Energy Stocks You Should Own Before the Next Oil Rally News ad

From time to time, markets combine to offer investors the perfect way to get into a particular sector, with each tailwind coming from other asset classes. Today, a tailwind is brewing in spreads between value and growth stocks, which have fallen to multi-decade lows, to show investors a potential shift in the market in the coming months.

When investors plot the difference between prices in iShares S&P 500 Value ETF NEW SIRKA: IVE and its far opposite iShares S&P 500 Growth ETF NYSEARCA:IVWThey will note that today’s level will mean that value stocks now represent a huge buying opportunity, but there is an even more important indicator at work for the energy sector.

Acting as a mirror image of oil prices, this value-to-advance spread and its recent sell-off will require a major rally in oil prices. This is why investors need to start looking at stocks in the oil value chain such as Transocean LLC. NYSE: INSTALLATION at the top of the value chain, Occidental Petroleum Co. New York Stock Exchange: OXY like Warren Buffett’s pick and finally the market’s bottom pick. Exxon Mobil Company. New York Stock Exchange: gold.

Why does a drop in value compared to a rise signal a potential rise in oil prices?

Growth stocks have significantly outperformed value stocks, pushing their spread (the difference in performance between them) to multi-year lows. These dynamics have important implications for the economy and the energy sector.

One possible consequence is that growth stocks could face a major pullback, leading to a “flight to safety” in the broader market. In such scenarios, assets such as oil and gold often rise. With gold already approaching new highs, this could signal an upcoming rally in oil prices as part of the broader commodity cycle.

Transocean shares: first on the path to profit growth

Now, with Transocean shares trading just 53% from their 52-week high, investors may see an opportunity to buy the stock and benefit from potential growth in the broader sector.

That’s why Wall Street analysts now recognize the growth potential of these stocks. They set a consensus price target of $6.25 today, suggesting upside potential of up to 70% from today’s levels. However, these analysts are not the only ones expressing optimism about Transocean shares.

Institutional investors at Primecap Management decided to increase their holdings in Transocean shares by 0.4% as of November 2024, reaching a high of $239.4 million or 6.4% ownership in the company to date. The move gives investors reason to be optimistic about the upcoming rally in energy companies.

Because Transocean leases equipment to major oil producers before they even begin new drilling, it is positioned to get paid first in the value chain, justifying the stock’s upside potential right now. Wall Street analysts are also forecasting earnings per share (EPS) for the next 12 months, compared to a net loss today.

Why Warren Buffett Justified Buying Occidental Petroleum Stock

Compared to the rest of the energy sector, Occidental Petroleum shares are trading at a price-to-earnings (P/E) ratio of 12.1x today, a significant discount to today’s average sector valuation of 16.9x. Any stock can become cheap, but Buffett saw plenty of reasons to buy these stocks because of their profitability.

Occidental Petroleum’s financials show that the company’s return on equity (ROE) was up to 14.9%.

For retail investors, this means an even bigger opportunity given that the stock is now below the levels at which Buffett started buying it, especially as it is sold off to 53% of its 52-week high.

Even those shorting the stock have decided to get out of the stock, and its upside potential is growing, as Occidental Petroleum’s short interest is down as much as 3.1% in the past month alone, a sign of bearish capitulation.

Institutional capital flows into Exxon Mobil stock

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

Representatives of the UBS group, in particular, confirmed their recommendation to buy Exxon Mobil shares, this time setting the company’s target price at $147.

To prove this point correct, the stock would need to rise as much as 36% from where it is trading today, not to mention a new high for the year.

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

Before you consider Transocean, you should hear this.

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

While Transocean currently has a Hold rating among analysts, the top-ranked analysts think these five stocks are Strong Buys.

View five stocks here

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