Oil's Ready to Rally: 3 Stocks to Buy as the Energy Sector Heats

Price action is often one of the most important indicators for investors to keep track of in the market, and price action only comes with the right amount of volume underneath. Knowing this, investors would benefit from looking into the recent price action and volume in the energy sector, particularly names operating in the oil industry.

The day after the United States presidential election, those names in the drilling and production niches of the oil industry did best to end the week, and the message that sends to investors is all they need to figure out what the future has in store for these names. Even Warren Buffett has taken an optimistic view of oil, as the value investing legend recently bought up to 29% of Occidental Petroleum Co. OXY. However, not all oil stocks are made the same.

Those higher up in the value chain, along with Buffett’s pick, can offer bigger—and faster—upside to investors, considering that they will likely end up getting paid first once oil prices rally. These names include stocks like Antero Resources Co. AR, Warren Buffet’s Occidental Petroleum, and Transocean Ltd. RIG. Each has its own risk and reward profile to offer investors all the appetites they need and seek in today’s market.

Antero Resources Stock Commands a Premium, Signaling Double-Digit Upside Potential

Most investors will see a stock trading at above-average valuation multiples, consider it expensive, and avoid it. However, some stocks will call a premium above peers for a reason. That reason often comes out to shine and bring the stock to new highs, though sometimes when it is too late for those who avoided it.

That is the case for Antero Resources stock, as it trades at a price-to-earnings ratio (P/E) of 208.8x today, compared to the rest of the energy sector’s average valuation of only 13x. Even though the stock would seem expensive today, Wall Street analysts would disagree.

In their view, Antero Resources stock is set to swing from a net loss per share of $0.24 into a net earnings per share (EPS) figure of up to $0.42 within the next 12 months, a sizeable swing to justify the valuation the stock commands today. That is why those at Bank of America have recently reiterated their Buy rating on the stock, placing a $36 a share price target on it.

To meet these new targets, Antero Resources stock would need to rally by as much as 24% from where it trades today, hence why the market is willing to pay so much for it today, out of the knowledge that if they become too selective with their entries, they might miss out on the run.

For Value Hunters, Occidental Petroleum Beats Premium-Priced Oil Stocks

If overpaying for growth, like in Antero Resources stock’s case, doesn’t align with investment theses. Occidental Petroleum stock might be a better stock pick, just like Warren Buffett, who also refuses to overpay for a stock, no matter what the growth prospects look like today.

By trading at a price-to-book (P/B) multiple of only 2x today, the stock offers a significant discount to the sector’s average of 3.5x. That valuation gap is also responsible for the double-digit upside being called from Wall Street analysts today, particularly those at Susquehanna.

These analysts recently reiterated their Positive rating on Occidental Petroleum stock while also keeping a price target of up to $78 a share. In this recent assessment, these valuations would need the stock to rally by as much as 55% from where it trades today.

Considering that the stock is now below where Buffett decided to initiate his buying, investors shouldn’t be surprised to see him accumulate more stock at these lower prices, reigniting a potential wave of additional buyers and bulls to run into the stock in the coming months.

Looking for Big Gains? Transocean Stock Offers High Risk and High Reward

Some investors have a mandate or a personal goal to finish 2024 with a strong stock in their books. This is where Transocean comes into play. However, the double-digit upside potential for the name does come with a price.

Having a high beta of 2.8 today would make this name a highly volatile investment, something investors need to keep in mind before considering it a Buy. However, this higher risk does offer significant upside. Wall Street analysts now have a consensus price target of $6.6 a share placed on this name.

To prove them right, Transocean stock would need to rally by as much as 48.2% from where it trades today. However, these current targets don’t fully reflect the demand for drilling and exploration equipment that could be headed to Transocean stock when oil prices trend back higher.

Despite the high volatility and the bearish price action over the past 12 months, short sellers have decided to scale back on their positions, knowing that the risk-to-reward profile is starting to move in favor of the bulls this time. Investors can see this trend through the 6.3% decline in the stock’s short interest over the past month.

The article "Oil's Ready to Rally: 3 Stocks to Buy as the Energy Sector Heats" first appeared on MarketBeat.