Energy stocks have gone from dogs to darlings over the last three months as crude oil prices have staged a recovery from their February lows.
While investors are feeling better about holding these companies, caution and discretion should be exercised, as volatility among the sector is likely to return. To avoid missteps, our models have identified a few long-term “Best of Breed” stocks that should benefit from continued stability while offering growth potential.
Among the top names within the energy group is Exxon Mobil Corporation (XOM). Exxon shares have made their way to the top of our model’s list for three reasons: strong fundamentals, strong technicals and a pessimistic sentiment.
This combination results in what we refer to as a “smart contrarian” trade that is likely to continue leading its sector and the market higher.
Why Investors Should Keep an Eye on XOM Stock
From a fundamental perspective, XOM has a forward price-to-earnings ratio of about 21, putting it in-line with the market and in the lower half of valuations of its peer companies. At the same time, cash flow and operating margins for Exxon Mobil stock are among the strongest within its peer group.
Finally, looking at current management’s effectiveness measurements by comparing return on invested capital, Exxon Mobil is the highest in its peer group, returning 6.08% on invested capital.
Technically, the stock reflects the fundamental strength. Year-to-date, XOM stock is trading 17% higher, with the energy sector trading just over 10% higher for the same period. This performance puts it at the top of the large-cap energy stocks in terms of relative strength.
Exxon Mobil’s shares are currently trading in a bullish pattern with support provided by its 50-day moving average, which is trending higher. Our quantified research shows that XOM is twice as likely to continue its positive trend when this trendline is moving higher.
From a long-term perspective, Exxon Mobil is trading in a bull market as it remains above its 20-month moving average, signaling that the long-term technical outlook is improving.
Despite the positive fundamental and technical backdrop, XOM is among one of the least crowded stocks in the energy sector. Currently, only 36% of the Wall Street analyst community is recommending the stock as a buy and 28% of analysts are actually recommending Exxon Mobil as a sell.
The lack of optimism among the analyst crowd signals a higher chance for potential upgrades, which will help the stock move even higher.
While not excessively high, the current short interest ratio for Exxon Mobil stock stands at 4.3, indicating that there is some potential for a short-covering rally as the stock climbs higher.
With the stock currently trading just above $90, our models are targeting a continuation of the current trend with an intermediate-term price target of $100 or higher. In addition to the price appreciation, XOM stock pays an attractive dividend yield of 3.3%, which is likely to make the stock even more attractive with the likelihood of the current low-interest-rate environment continuing through the rest of 2016.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
