Investors often search for the holy grail in the world of trading and investing, looking for that one strategy, chart pattern, or indicator that will bring them to the land of riches. Despite how hard they look, the trend is the same: More often than not, they turn out empty-handed and disappointed. But there is still hope for one more try, and this time, it works.
As bold as it may sound, this economic indicator is 100% accurate in predicting the next bull run in certain stocks. History will prove that the most accurate and predictive sector is found in energy stocks, which is where investors could—and should—focus today, especially as this indicator just flashed green.
To take on these views, investors can back the Energy Select Sector SPDR Fund (NYSEARCA: XLE) and be exposed to the broader energy trends in the entire marketplace. Alternatively, they can drill deeper into the industry and find the potential best opportunities today. These include Occidental Petroleum Co. (NYSE: OXY) and Chesapeake Energy Co. (NASDAQ: CHK).
Why History Repeating Could Mean Big Gains for These Stocks
The yield curve is measured as the spread between the ten-year U.S. bond yield minus the two-year U.S. bond yield. Charting this spread can give investors the image of a clear cycle, with repeating pivots and averages during the changing inflation and interest rates.
Every once in a while, the yield curve becomes inverted, where the yield on the two-year bond surpasses the yield on the ten-year bond. This is different from how things should be. Simply put, this inversion means that there is too much liquidity in the market, and it is about to be removed.
That is what the Federal Reserve has been doing with its balance sheet, selling treasury securities and taking cash from the market to stop inflation and other potential bubbles. When the economic spectrum recovers and liquidity withdraws to bring inflation and consumption under control, the curve ‘steepens.’
Three instances will come to show investors. The year 2000 saw a negative yield curve, and the ample liquidity resulted in the technology sector bubble. Then, in 2006, the subprime mortgage crisis created a bubble, and now, in 2023, a bubble has yet to be spotted.
Investors can take away that, in each instance, the yield curve inverted and then went to the positive end; it is energy stocks that outperformed the rest of the market on average. In 2000, the energy sector ETF rallied by over 210% in the next five years.
In the second instance of an inverted yield curve, the energy ETF rallied by over 100% from 2009 until 2014. Today, as the yield curve is finally returning to the upside, the energy sector ETF may be on its way to another triple-digit rally. Still, not all energy stocks are made equal.
Warren Buffett Picks Occidental Petroleum
Recently, Warren Buffett went on a nine-day buying spree in shares of Occidental Petroleum stock, ending up with a 29% ownership in the company. The timing of this purchase is interesting, mainly because the market is potentially about to go on a bull run in these selected sectors.
Buffett isn’t alone in sharing his enthusiasm for this company; Wall Street analysts now forecast up to 32.5% earnings per share (EPS) growth for the next 12 months in Occidental Petroleum stock, a significant prediction for a company that’s $53.7 billion in size.
These trends helped analysts at Scotiabank place a $80 share price target on Occidental Petroleum stock, daring it to rally by as much as 32.2% from where it trades today. On a valuation basis, especially price-to-earnings (P/E), Occidental Petroleum stock stands out as a positive outlier to show investors how the market really feels about it.
A 16.5x P/E commands a premium of 14% over the energy sector’s average 14.5x valuation, and markets typically have a good reason to overpay for any stock. An inverted yield curve might be one of them.
Chesapeake Energy's Path to Explosive Growth
Analysts didn’t hold back when forecasting EPS growth for Chesapeake Energy stock, as they see a potential for up to 299.2% growth in the next 12 months. The sentiment has led those at Mizuho Financial to boost their price targets to $111 a share on this stock, calling for 42.7% above today’s stock price.
Leaning on this momentum, those at Blackstone (Chesapeake’s largest shareholder) decided to boost their positions in the company by 0.1%. While this may not seem like much on a percentage basis, it brought the company’s net investment up to $1.1 billion today.
The fundamental picture looks like it’ll deliver on Wall Street’s forecasts, as the ISM manufacturing PMI index has proven that the oil industry is the only one managing to keep expansion readings for the past quarter, in the middle of a 20-month consecutive contraction for manufacturing as a whole.
As a proper outlier, markets have bid up that stock to trade at 83% of its 52-week high, which gives it enough bullish momentum to justify a second look from investors. However, it is low enough to promise to deliver on a double-digit upside.
