Exxon Mobil (NYSE:XOM) was oh-so-close to its all-time closing high of $95-and-change earlier this week before a generalized market selloff and profit warning from fellow Dow component Chevron (NYSE:CVX) sparked a retreat.
Like the wider energy sector, Exxon, the nation’s largest integrated energy major, is forecast to post lower sales and profits when it reports third-quarter earnings Nov. 1 — but don’t tell that to the stock market.
Exxon stock has been a huge second-half winner. Shares are up more than 17% since May 31, beating the S&P 500 by 5 percentage points.
And yet the energy sector is expected to post a sharp drop in profits this earnings season, as sluggish global growth has led to a year-over-year drop in prices for oil, natural gas and coal (California pump prices notwithstanding).
So what’s behind the recent run-up? Middle East tension always gives oil prices a speculative boost — and so does easy monetary policy. More quantitative easing on the part of the Federal Reserve fuels energy prices — and energy stocks — since it pushes down the dollar and thus gives a boost to commodities priced in dollars.
Anticipation and then delivery of QE3 has oil prices and Exxon’s stock chart practically moving in tandem. Benchmark Brent crude oil futures bottomed out below $90 a barrel in early June and have since rallied more than 25% to $112. Exxon Mobil, meanwhile, saw its shares bottom out for the year-to-date on June 4 — and they’re up more than 18% since then.
And that’s despite softness in China, the U.S. and recession in Europe, which is depressing demand and boosting inventories to record highs for this time of year.
Now, Exxon’s stock might not be able to keep up that wide outperformance in the short-term — witness Wednesday’s profit-taking after Chevron warned. But pullbacks offer long-term investors an opportunity to dollar-cost average into a high-quality name at lower prices.
As we noted in July, Exxon has the best value, quality and growth profile of any energy giant — and that’s still true today.
Not only is Exxon the biggest oil and gas company in North America and the biggest oil refiner in the world (and a component of InvestorPlace‘s Real America Index, representing the state of Texas), but it also has paid a dividend so dependably that its payouts have grown at an average annual rate of 6% over the last three decades, earning it a place on InvestorPlace’s list of Dependable Dividend Stocks.
True, after the huge second-half run-up, Exxon stock no longer screams “bargain,” but shares don’t look particularly pricey either. The stock trades in line with its own five-year average on a forward earnings basis, according to data from Thomson Reuters Stock Reports. And by trailing earnings, it offers about a 15% discount to its own five-year average.
Meanwhile, Exxon’s price/earnings-to-growth ratio — or PEG, which measures how fast shares are rising relative to their growth prospects — is likewise in line with its own long-term average, but stands a good 15% below that of the broader market.
We’ve said it before and we’ll say it again: If you had to pick just one giant energy stock to play the final quarter of the year and beyond, Exxon looks like the best oil major, with fundamentals, valuation and quality all at its back.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
