Every once in a while, the markets align themselves to offer investors a perfect way to get into a specific sector, with every tailwind behind it coming from other asset classes. Today, there are tailwinds brewing in the spreads between value stocks and growth stocks, which have fallen to a multi-decade low to show investors a potential shift in the market for the coming months.
When investors graph out the difference between prices in the iShares S&P 500 Value ETF (NYSEARCA: IVE) and its distant opposite the iShares S&P 500 Growth ETF (NYSEARCA: IVW), they’ll notice that today’s level would imply that value stocks are now a tremendous opportunity to buy, but there is an even greater indicator at play for the energy sector.
Acting as a mirror image of oil prices, this value-to-growth spread and its recent selloffs would call for a major rally in oil prices. This is why investors need to start considering stocks in the oil value chain, such as Transocean Ltd. (NYSE: RIG) at the top of the value chain, Occidental Petroleum Co. (NYSE: OXY) as a Warren Buffett pick, and finally, a bottom-market pick through Exxon Mobil Co. (NYSE: XOM).
Why Falling Value vs. Growth Spreads Signal Potential Rallies in Oil Prices
Growth stocks have significantly outperformed value stocks, driving their spread (the performance gap between the two) to a multi-year low. This dynamic has important implications for the economy and the energy sector.
One potential outcome is that growth stocks could face a major pullback, prompting a “flight to safety” across the broader market. In such scenarios, assets like oil and gold often experience rallies. With gold already approaching new highs, this could signal an impending rally in oil prices as part of a broader commodity cycle.
Transocean Stock: First in Line to Earnings Growth
Now that Transocean stock is trading at only 53% of its 52-week high, investors might see an opportunity to buy it and capitalize on potential rallies in the broader sector.
This is why Wall Street analysts now recognize the inherent upside in this stock. They have placed a consensus price target of $6.25 today, calling for up to 70% upside from where it trades today. However, these analysts aren’t the only ones willing to express their optimism about Transocean stock.
Institutional investors from Primecap Management decided to boost their holdings in Transocean stock by 0.4% as of November 2024, netting their position at a high of $239.4 million today or 6.4% ownership in the company. This move gives investors a gauge for optimism in this name for the coming rally in energy names.
Because Transocean leases out the equipment to the big oil producers before they even get started with new drilling, it is set up to get paid first in the value chain, justifying the upside figures behind the stock right now. Wall Street analysts are also forecasting net earnings per share (EPS) for the coming 12 months, up from today’s net loss.
Why Warren Buffett Justified a Purchase in Occidental Petroleum Stock
Compared to the rest of the energy sector, Occidental Petroleum stock trades at a price-to-earnings (P/E) ratio of 12.1x today, a significant discount to the sector’s average 16.9x valuation today. Any stock can become cheap, but Buffett saw enough reason to buy this stock because of its profitability.
Occidental Petroleum’s financials show the company generated up to 14.9% in return on equity (ROE) rates.
For retail investors, this means an even better opportunity, considering that the stock is now below the levels where Buffett started buying it, especially as it has sold off to 53% of its 52-week high.
Even short sellers decided to step away from this stock, and its potential upside is coming up, as Occidental Petroleum’s short interest has declined 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 decided to boost their investments in Exxon Mobil stock by as much as 16.3%, bringing their net holdings to a high of $3.9 billion today. In addition to these institutional investors, some Wall Street analysts decided to boost their views on the stock.
Those from the UBS Group, particularly, reiterated their buy rating on Exxon Mobil stock, this time placing a $147 price target on the company.
To prove this view right, the stock would need to rally by as much as 36% from where it trades today, not to mention a new high for the year.
Even if the shift out of growth stocks into other value stocks, such as these energy plays, takes a while to come through, Exxon Mobil stock offers shareholders a payout of $3.96 a share today, or an annualized dividend yield of 3.7%.