Marathon Oil will be the name to watch if oil prices heat up

Not all stocks are created equal, and energy stocks could quickly become market favorites this year. A once-in-a-lifetime opportunity to align your portfolio with all the macro forces at play could be just around the corner. Some analysts, who expect a new rally, have already started to spot likely outliers in this group, but more on that later.

Traders have recently become bullish on oil as futures are higher ECM Group NASDAQ: ECM reflect on the fact that futures are now in a situation of contango. Contango is a fancy way of saying that traders are optimistic about the future price of oil. The last time this happened was in 2021. You all know what oil did a year later (it hit $115 a barrel).

There are many reasons to believe that oil could reach $100 a barrel again, from macroeconomic trends to the opinions of one of Wall Street’s most followed investment banks. However, the only thing you need to worry about for now is this Marathon oil NYSE:MRO could be the best positive story in this next rotation.

Get the big picture first

There is a clear divide between SPDR Fund Energy Select Sector NYSEARCA: XLE and the broader S&P 500 index, which has underperformed by up to 24.6% over the past twelve months, leaving the energy sector behind all others. As always happens in cycles, a new monetary rotation could swing this gap in favor of energy.

As the market now expects the Fed to cut interest rates this year, commodity-based stocks could see a significant inflow of investment dollars. According to CME Group’s FedWatch tool, traders are pricing in cuts that could come as early as May or June of this year.

But, of course, money rarely waits until change is under its nose to initiate movement. It is likely (as you know with futures traders) that some large players are already positioning themselves. Analysts at The Goldman Sachs Group NYSE:GS have expressed their projection for oil prices in 2024, which are between 70 and 100 dollars per barrel.

It is no coincidence that these same analysts, in their report on the macroeconomic outlook for 2024, expect to see a turnaround in the manufacturing sector in the US economy. Increased manufacturing activity will require a lot of oil, which is another way for Goldman to warn you of an oil rally ahead.

So, look, all these macro trends and theories sound interesting, but what will cause the shift in the energy sector? In addition to waiting for potential Fed cuts this year, growing geopolitical conflicts are already starting a small fire for the commodity.

Why Marathon?

This is all good for Marathon Oil stock, but why not look at other competing stocks? After all, Buffett made the choice Western oil NYSE: OSSI and stayed there for a while. But you’re not here to add stocks to your retirement; you’re looking for the best way to get in and out of this next swing in the cycle.

To position your portfolio in this top pick, two things should come up first in the filtering process. First, you want to get into the stock that offers above-average earnings growth, right? You should get the shares at a cheaper valuation than other alternatives.

Taken as a whole, the oil and gas industry is expected to grow its EPS at an average rate of 7.1% over the next twelve months. Buffett’s Occidental led analysts to forecast growth of 18.6%, while Marathon instead recorded growth of 21.5%.

While both are expected to grow at rates above the industry average, there’s no denying Marathon’s slightly more significant growth. So, the real difference now comes in terms of valuation. With a P/E ratio of 14.6x, Occidental trades at a 63.2% premium valuation to Marathon’s multiple of 9.0x.

Since one is cheaper but expected to grow more than the other, the same analysts who made their EPS projections also reflected this view through their price targets. With a price target of $31.20 per share, Marathon analysts expect a 33.3% rally from where the stock is trading today.

On the other hand, while a $70.10 price target for Occidental shares offers a decent 15.8% upside from today’s prices, that’s half the upside you’re now privy to in Marathon. Do yourself and your wallet a favor and consider MRO stocks for your “energy rally” scenario.

Before you consider CME Group, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and CME Group wasn’t on the list.

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