Oil is – and has always been – the primary driver in energy stocks. When prices swing as aggressively as they are about to, investors tend to position themselves with more than clear expectations. However, it doesn't all start and end with oil prices; there are plenty of ways that you can spot a trend before it forms.
Watching out for specific price action in currencies and bonds or breaking down the trends in the ISM PMI indexes can help you get ahead of the curve. Possible additions to the "professional trader" portfolio may include names like Hess Co. (NYSE: HES), Chesapeake Energy Co. (NASDAQ: CHK), and even Transocean Ltd. (NYSE: RIG).
As it relates to oil, rather than just watching the price at the gas pump go up for an indicator, you can start connecting the dots, maybe even the same ones connected by analysts at The Goldman Sachs Group Inc. (NYSE: GS) as they project oil prices to go as high as $100 per barrel this year.
Rate Cuts Started it All
The stock market may have gotten ahead of itself, reaching new all-time high prices recently in expectation for the Federal Reserve (the Fed) to cut interest rates later this year. However, not all stocks followed suit.
Technology stocks like Nvidia Co. (NASDAQ: NVDA) have recently taken the lion's share of attention. In contrast, others have yet to see new rallies.
Goldman expects to see a breakout in the United States manufacturing sector this year, and the latest data from the manufacturing PMI index suggests that they may be right. Export orders rose 6.4% in February. This meant exports were the largest driver of economic growth that month.
Now, in order to fill these new export orders, there needs to be production right? More production means more profits for stocks dealing in the international markets, conglomerates such as The Coca-Cola Co. (NYSE: KO) and others.
However, production, shipping, and other steps in the value chain only happen with oil, hence the rising prices ahead of demand. This trend has affected the way the dollar index has moved recently. The Euro-to-Dollar rate rose from 1.07 to 1.09 this month, weakening the dollar against other foreign currencies.
These Stocks Aren't a Blind Bet
Markets tend to pay a higher valuation for stocks expected to outperform the market or at least their peers. This is why you need to look for those who stand out in the oil and gas industry, which trades at an average forward P/E ratio of 9.0x today.
You also need to make sure there is a good enough reason to overpay for a stock, which typically comes down to how much earnings per share (EPS) are projected to grow in the coming months. These two components are why these stocks are a top pick.
When Size Matters, Go With Hess
At a $45 billion market capitalization, Hess commands the highest forward P/E of the group. Its 15.6x valuation places it at a 67% premium to the industry average and above both Chesapeake and Transocean.
However, this is the name that expects the least EPS growth. Analysts see Hess's EPS advancing by 28% in the next 12 months; that's nothing to write home about until you consider its size.
Companies this big simply don't grow at double-digits that easily, and an international presence acts as a bonus of stability and quality for markets to justify a higher premium.
No wonder Mizuho Financial Group Inc. (NYSE: MFG) analysts placed a $200 price target on the stock, calling for a rally of 33% from today's prices.
Chesapeake and Transocean: A Chance to Double Your Money
If you are looking for more excitement and risk, Chesapeake and Transocean may do it for you. With the most expected EPS growth in the industry, these stocks have a long way to go until they reach a ceiling.
Projecting bold 370% EPS growth for Transocean, analysts think this stock could go as high as $8 a share, roughly 40% higher than its current price.
That much growth for a company that's only $4 billion in size should command a higher price target, so maybe analysts are waiting to see how higher oil prices affect its financials. Price action is also compressed here, as the stock trades at 65% of its 52-week high in expectation of a clearer message.
That makes for a contrarian bet. Now, Chesapeake is the one where you can tag along with the market's momentum. That stock trades at 95% of its 52-week high price, and analysts see 130% EPS jumps for the next 12 months.
With a 12.8x forward P/E, Chesapeake trades at a 37% premium to the industry. Because it has seen better price action, showing the market's acceptance of this growth play, it trades at a premium of 8% to Transocean.