Think Twice Before Buying ConocoPhillips Ahead of Earnings

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ConocoPhillips stock - Think Twice Before Buying ConocoPhillips Ahead of Earnings

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ConocoPhillips (NYSE:COP) has been on absolute fire lately as investors pile into energy names. In fact, the whole Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) has been in rally mode. But should you think twice before buying ConocoPhillips stock ahead of earnings?

I would.

Even though the fundamental situation is looking more and more attractive, the charts tell a different story. There’s some good news for bulls and bears, but overall, I’d be cautious. We can get to the charts in a minute — let’s first take a look at the fundamentals.

COP stock is up 12% this month, outperforming names like Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and the XLE ETF. The group’s outperformance has been on the back of rising oil prices. For instance, WTI crude prices have risen from $58 in mid-February to $69 at current levels. The 19% gain gives a big boost to a whole host of energy companies.

Year-over-year, WTI prices are up more than 32% and even more from the summer 2017 lows. That’s helped a number of solid energy stocks on our radar. After years of suffering, energy companies are finally reaping the benefits of higher energy prices. Part of this boost is rising inflation, as higher inflation gives a bump to commodity prices.

Valuing ConocoPhillips Stock

So where does this leave ConocoPhillips stock? Analysts expect earnings per share of $2.78 this year, a figure that could climb notably should oil prices continue higher. It would almost surely give a boost to 2019 estimates, which call for 5.8% growth to $2.94. Remember, COP only earned 60 cents per share in 2017.

Another fact worth pointing out: Estimates for 2018 stood at just $1.81 per share three months ago. Estimates for 2019 were only calling for earnings of $2.29. So it’s not as if the recent energy gains have gone unnoticed on COP’s bottom-line expectations.

Based on these prices, ConocoPhillips stock trades at 23 times this year’s earnings and about 22 times next year’s earnings. I have a hard time valuing COP stock, given its almost 400% earnings growth this year. On a price-to-operating-cash-flow basis though, it’s trading at a premium to its long-term historical average.

Still, given the recovery in oil prices, investors obviously seem fine buying this beaten-down stock. COP’s recent news out of Alaska bodes well for operations as well.

Trading ConocoPhillips Stock

As you can see on the daily chart below, COP stock has been on fire, bursting through $60 and quickly running to $67. However, the MACD — which measures momentum — may top out soon (blue circle). Further, the Relative Strength Index (RSI) up top shows that ConocoPhillips stock may be overbought too.

chart of COP stock price
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Since September, COP has been overbought four other times, which we highlighted with green arrows. Each time, weakness ensued — although admittedly that weakness didn’t always last for long. The overbought condition can be seen in the long-term chart below as well:

Chart of ConocoPhillips stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

On the five-year weekly chart, we can see three instances with an RSI reading over 70. Currently though, the reading is only 71.85 and could easily climb to 75 or higher. At one point in 2014, the reading almost hit 90, so there could easily be more upside before a correction. The MACD could also be topping on ConocoPhillips stock.

There is one saving grace for bulls. With its surge above $65, ConocoPhillips stock cleared a notable long-term level. While it wasn’t evident on the short-term chart, $65 can easily be identified on the long-term view. As long as COP stays above it, bulls can justify a long position. Below $65 and it’s worth considering whether COP will fall back to $61.

Of course, energy prices are likely to be the big driver in that decision. With earnings on April 26 and after such a big rally, it’s hard to be too bullish — unless investors are only looking to play a possible run-up into the print.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no position in any stock mentioned. 

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/think-twice-before-buying-conocophillips-cop-stock/.

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