Shares of Exxon Mobil (NYSE:XOM) have been struggling lately. XOM stock is now at the lowest levels since the market meltdown last December. Some of this weakness may be attributable to slightly lower oil prices and tariff turmoil. The selling, however, is starting to get a little overdone. Time to be a buyer of Exxon Mobil stock on any further dip.
Exxon Mobil reported earnings on Aug. 2. EPS of 73 cents handily beat consensus estimates of 66 cents. Revenues trounced analysts estimates, coming in at $69.09 billion versus $65.2 billion consensus. This marked the third time in the last four quarters that it has exceeded expectations, yet XOM stock is down in that same time frame. This combination of a lower stock price and higher earnings certainly makes Exxon stock a solid value play at current prices.
Click to Enlarge Exxon Mobil just hit a 5% yield, by far the highest level in the past five years. It is also more than triple the yield on the 10-year Treasury. The payout ratio is only 80%, so the dividend is certainly safe for the foreseeable future. Income investors will likely start to gravitate towards higher yielding blue chips like XOM stock as interest rates continue to plummet.
Valuations are looking attractive as well at current levels for XOM stock. Traditional metrics such as price to earnings, price to book and price to free cash flow are all well below the five-year average. Price to sales is nearing 1 and is at the cheapest multiple in four years.
The last time Exxon Mobil stock was this cheap on a fundamental basis marked a significant low in the XOM stock price.
XOM Stock by the Numbers
Click to Enlarge Technicals are also pointing to a potential rally for XOM. There is significant support for Exxon Mobil stock near the $70 area. The five-day RSI reached oversold levels that corresponded to lows in the past. MACD also reached extremes that typified a bottom for the stock.
XOM stock is trading well below the 20-day moving average which has been a precursor to a pop in the past.
More importantly, Exxon Mobil is trading at a big discount to oil prices. Normally, XOM stock is fairly well correlated to the price of oil — as one would expect for the largest U.S. oil company. Recently, however, that correlation has broken down, with XOM being a big underperformer. I expect that correlation to converge and for Exxon Mobil stock to be a relative outperformer to oil in the coming months.
Click to Enlarge Investors looking for a place to hide out during these tumultuous markets may want to consider XOM stock near current levels. The combination of historically cheap valuations and a rich 5% dividend yield should buffer the downside, while the improving technicals point to a move higher in Exxon Mobil stock price. The recent highs near $77 would be my initial upside price target. Selling a Jan $77.50 covered call would bring in an additional $1.00 worth of option premium and position to be a seller at $78.50.
Option traders should consider buying the Jan $70 calls and selling the Jan $72.50 calls for a $1.15 net debit. Maximum risk is the premium paid of $115 with maximum gain of $135. Potential return is 117% if XOM stock closes above $72.50 at January expiration.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.