Top 3 Stocks to Play Oil's Potential Comeback Rally

Oil prices are on the lower end of the curve in today’s cycle. Still, plenty of tailwinds are set up to potentially bring a new rally for the commodity. Demand has been lackluster lately, and supply isn’t moving the way markets want it to move in order to bring a new rally or oil. But there’s a reason why America’s favorite investor has been buying heavily into oil lately.

Over the next quarter or two, the new business cycle could help investors looking into the energy sector make a profit. However, there are many ways to capitalize on the potential rally in oil, and investors could get lost in the selection process without knowing what their options are today. This is why today’s list is more important than ever to consider.

Considering names like the United States Oil Fund LP USO to gain exposure to a fund that holds and trades oil futures in order to track the price of oil itself. Then, one of the market’s favorite players at the top of the value chain is Transocean Ltd. RIG. Finally, while not an energy name, FedEx Co. FDX could become attractive when and if transportation costs rise due to higher oil, and people need more efficient transport services.

Why the US Oil Fund Is a Smart Bet: Rising Oil Prices Could Boost Returns for Investors

The oil futures curve is complex to get right, which is why this fund has a team of traders and managers to make sure that the fund’s oil futures holdings closely reflect the price of oil futures daily, plus or minus a certain percentage due to the contract date mix and management costs.

Realizing that oil prices could rise in the coming months, a few—although smaller—institutional players decided to buy some exposure to the oil fund as recently as October 2024. Leading the buying spree were those at CWM LLC, boosting their holdings by 134.2% and netting their investment to $179,000 today.

Then there is the Creative Planning fund, which added 7.7% to its oil fund positions, bringing its total holding to $942,000 today to show investors there is still some interest in the commodity today. For this reason, some people think oil could be headed higher in the coming months.

Sentiment started to shift when mega investor Warren Buffett decided to buy up to 29% of Occidental Petroleum Co. OXY over the past few quarters, which got the rest of the market thinking. Then, a major event took place: the Federal Reserve (the Fed) cut interest rates at the most aggressive pace in 16 years, which turned the market.

Lower interest rates will bring more business activity, which will result in more oil demand. However, not all business activity is created equal. Investors need to see the manufacturing sector pick up specifically, which has been contracting for 23 consecutive months, according to the manufacturing PMI index.

Once that happens, investors could see oil prices start to get back on track. Here’s another reason: Chinese stimulus could bring the nation back in the game (it represented 40% of oil demand before COVID-19). Judging by the rallies in Chinese stocks recently, that catalyst might be closer than most think.

Why Transocean Is the Market’s Top Energy Stock Today

It might not be obvious until investors decode the market's language. Comparing Transocean's stock to that of its peers in the rest of the energy sector is critical here, and it all has to do with its business model. As a rig equipment leasing company, it is the first to get paid when the bigger oil producers come to the table looking to produce more oil in the future.

The way to decode this sentiment is through relative valuations and, of course, Wall Street's take. Transocean stock trades at a forward price-to-earnings (P/E) ratio of 64.3x today, compared to the rest of the energy sector's average valuation of 11.5x today.

Markets typically pay a premium for stocks they expect to grow by the most in the future, something Wall Street analysts are already betting on. Earnings per share (EPS) projections are set for $0.14 for the next 12 months, a significant improvement from today's net loss of $0.15.

This is why analysts also have a consensus price target of $6.88 a share, which calls for a net upside of 63.3% from the current price.

Analysts Project Double-Digit Upside for FedEx Stock

After a recent earnings sell-off, FedEx shares could become attractive in the coming quarters if oil prices manage to move higher from where they are today. FedEx’s robust and developed transportation network could help distribute costs more effectively when and if fuel prices rise as a result of more expensive oil.

Knowing that this thesis could play out, analysts at J.P. Morgan Chase decided to reiterate their “Overweight” rating on FedEx stock as of September 2024, landing on a price target of $350 a share for the company. FedEx would have to rally by as much as 28% to prove these targets right from where it trades today.

More than that, some institutional investors came in recently to close the gap between the previous sell-off and the stock’s fair value. Those at Value Partners Investments boosted their positions by 0.3% in the past quarter, bringing their net investment to up to $39.6 million today.

The article "Top 3 Stocks to Play Oil's Potential Comeback Rally" first appeared on MarketBeat.