Energy is this year's hottest trade. Wall Street analysts say buy these stocks in the fourth quarter

Published Fri, Oct 1 202110:24 AM EDT

The energy sector was the only S & P group to finish September in the green. With the fourth quarter kicking off, Wall Street analysts see more gains on the horizon for the year's hottest trade. With September's gains energy is once again the top-performing S & P 500 group for the year, although it did finish the third quarter in the red due to some weakness over the summer as the delta variant temporarily halted demand for petroleum products. Still, the sector is up 38% for 2021. Financials and real estate are the next best performers, rising 27% and 22%, respectively. The surge in oil and natural gas prices has supported energy stocks. Brent crude , the international oil benchmark, traded above $80 per barrel this week for the first time since October 2018, while natural gas futures surged above $6 per million British thermal units to the highest level in more than seven years. Demand is recovering as people hit the road and economies around the world reopen, while supply remains in check. Heading into the winter, stockpiles are below normal, especially in Europe where an energy crunch has sent power prices shooting to all-time highs. Amid this backdrop, Goldman Sachs envisions Brent rising to $90 by the end of the year. This, in turn, should help energy companies' bottom line. "We remain constructive on the broader oil sector, with memories of 2003 underinvestment cycle coming sharply into focus," added analysts at Bank of America. To find Wall Street's top picks for the fourth quarter CNBC Pro combed through the energy sector for names that at least 70% of analysts say to buy. From that list, we focused on stocks that have at least 10% upside based on average price targets. ConocoPhillips is one of the names on the list, with 80% of analysts holding a buy rating on the stock. The company recently announced the acquisition of Shell's Permian Basin assets for $9.5 billion. "Acquiring Shell's Permian business is a positive catalyst for COP as it adds to free cash flow earmarked for return to shareholders and provides optionality for improvements including economies of scale," Atlantic Equities said in a note to clients following the purchase. Shares of the energy company are up about 72% for the year, and analysts see the stock rallying another 14%. Exploration and production company Diamondback Energy is another name that makes the list, with 80% of analysts favoring the stock. Shares of the company have roughly doubled this year, and analysts see another 20% rally on the horizon. In September, the company announced plans to accelerate its capital return program, saying it plans to return 50% of its free cash flow to stockholders beginning in the fourth quarter, instead of in 2022 as previously planned. Additionally, Diamondback Energy announced a $2 billion share repurchase program. "We believe the accelerated return program, complemented by the share repurchase program, highlights Diamondback's strong operational and financial performance and commitment to capital discipline and shareholder returns," Stifel said in a note to clients following the announcement. "The company's cost leadership, balance sheet, minerals, and midstream ownership are a few of the reasons it is well-positioned to outperform as activity increases," the firm added. Refiner Marathon Petroleum also makes the list with nearly 80% of analysts saying to buy the stock. Valero and Baker Hughes are two other names on the list. - CNBC's Michael Bloom contributed reporting.

Oil pipelines, pumping rigs, and electrical transmission lines dot the landscape along California's "Petroleum Highway" (Highway 33) running along the northwestern side of the San Joaquin Valley.

George Rose | Getty Images

The energy sector was the only S&P group to finish September in the green. With the fourth quarter kicking off, Wall Street analysts see more gains on the horizon for the year's hottest trade.