They say that you should take analyst projections and ratings with a grain of salt and that the actual language of the market is read through valuation ratios and price action. You could follow this logic, but as often does, it will probably lead you down a rabbit hole of ideas and wasted brain power.
The market has left a cryptic message surrounding a specific group of oil stocks, one that will be uncovered today as the homework has been done for you to save precious time but still get the protein of the action. So do yourself - and your portfolio - a favor and strap in.
Loaded with price action, making them clear outliers from their peers, stocks like Petroleo Brasileiro (NYSE: PBR), Shell (NYSE: SHEL), and even ConocoPhillips (NYSE: COP) are beginning to shine ahead of the sector, promising a bright future ahead just in time to finish the year on a profitable note.
The truth is in the price
On a year-to-date basis, the energy sector has underperformed the broader stock market, as measured by the relative performances between the S&P 500 and the Energy Select Sector SPDR Fund (NYSEARCA: XLE), which points to energy underperforming by as much as 17.0%.
So, why would you be at all interested in an underperforming sector? Well, it is not the whole sector you are after. But instead, a few names have left the group's norm, offering you significant upside potential in a sector ripe for a turnaround in the coming year.
Because energy stocks typically outperform the market when a cyclical slowdown is expected to hit the economy, you can begin to hedge against the potential risk of a recession in 2024. However, if there is no recession, the momentum in this list of stocks alone can still carry you forward.
It all begins with price action; taking the oil and gas integrated industry into the analysis, you can find that - on average - these stocks are trading at prices that reflect 82.4% of their 52-week high prices, which is nearly an official bear market as defined by Wall Street's 20% discount from increased costs.
Do you know which names in this group are far from this average, implying bullish momentum in a sector dominated by bears? You guessed it: Petrobras, Shell, and ConocoPhillips!
But by how much? Respectively, these stocks trade at 92.0%, 95.0%, and 85.0% of their 52-week highs. Such price action can only be brought on by an overwhelming presence of bulls dominating the buy-side of the order block flows. But wait, there's more.
Surprise element
So how come nobody is talking about this tremendous price action? The valuations attached to this list of stocks are not representative of what the market is used to seeing in high-potential stocks today.
As a group, this sector trades at a forward price-to-earnings ratio of 7.9x. Taking Petrobras, for example, a 4.1x would make it a 'less favored' name since markets will undervalue companies they expect to underperform in the future. However, this simple bias seems to come from the sole fact that Petrobras is based in Brazil!
Trading at 92.0% of its 52-week high and being valued at 4.1x forward P/E doesn't add up. So, in this case, you can ask yourself: Are analysts playing it safe in their earnings projections, or is the market (which includes the brightest minds on Wall Street) wrong in bidding up this stock to such momentum?
Yeah, you can probably guess that analysts are playing it safe, especially regarding an emerging market stock like Petrobras. What is the situation with the other 'better known' names in this bull list?
For Shell, you can see that 95.0% of its 52-week high is accompanied by an 8.1x forward P/E ratio, representing a premium of 3.0% over the industry's average multiple. However, because Shell is exposed to international oil markets, analysts may still be playing their earnings projections on the low end... Sigh.
Despite a negative 5.4% EPS projection for 2024, markets are still bidding up the price of this stock, and as you know now, price action never lies.
Okay, it's time to uncover the bias impeding analysts from reflecting their views; ConocoPhillips is up. At 85.0% of its 52-week high price, this stock demonstrates the most significant premium to the sector, 30.6% above the average brought on by a 10.3x multiple.
This valuation is made possible by analysts expecting a 26.1% rise in earnings for the next twelve months, which is above the industry's 9.8% average. ConocoPhillips' operations are heavily lenient in the United States.
So, while markets are bidding up the prices of international oil stocks, analysts are careful to focus their bias on U.S.-based ones. This is not necessarily a bad thing; in fact, it's actually smart. With all the conflict in geopolitics, it's safe for them to point their expectations to a safer-seeming stock like Conoco.
Either way, you turn, these stocks are offering you not only momentum but cheap valuations; it is up to you to decide whether you want to take the international route or the domestic one.
