Shares of Chevron (NYSE:CVX) are finally starting to find some footing after a period of consolidation. Chevron stock had a decent run last year, moving higher by just over 11%. This pales in comparison to the nearly 25% gain for the Dow Jones Industrials however. CVX was the ninth-worst performer in the Dow 30 in 2019.
Now that oil prices have headed substantially higher and Iranian tensions have taken center stage, look for an undervalued Chevron stock to be a standout performer in 2020.
The past two earnings reports have both been major beats for Chevron stock. Last quarter saw earnings of $1.59, which handily beat consensus estimates of $1.47. Q2 was an even bigger upside surprise with EPS of $2.27 trouncing expectations for $1.74.
Yet in that time frame CVX is virtually unchanged from a price standpoint. This combination of better earnings and a similar stock price makes for a decidedly more attractive valuation.
CVX Stock Valuation
Indeed, CVX is trading at recent lows on a price-to-earnings basis. The current multiple of 17.4 is well below the 5-year average of over 30. It is also at a big discount to the 22.6 multiple for the S&P 500. Chevron stock pays nearly a 4% dividend with less than a 75% payout ratio. This is over twice the 1.9% yield for the S&P 500. The combination of a lower multiple and higher yield should provide investors with a higher level of comfort, especially during more turbulent market conditions that may be looming.
CVX stock is looking better from a technical perspective. Chevron stock finally broke out to the upside from pennant formation formed from a series of lower highs and higher lows. There is major downside support at the $116 level in addition to support at the 100 day moving average near $118. MACD remains firmly in positive territory.
Chevron stock, as one of the world’s largest energy oil producers, is normally correlated to the price of crude oil . Lately, however, that correlation has broken down. CVX is now trading at a largest discount to the price of oil over the past six months, as seen in the chart below.
Crude has rallied 14% since bottoming out near $55 in early December, while Chevron has moved higher by less than 4%. Look for the correlation to begin to revert and for Chevron stock to head higher over the coming months, especially if oil continues to rally on Iranian fears.
Friday saw some unusual call option activity in Chevron stock options. Over 5,000 contracts of the Jan 31 $125 calls traded versus only 553 open interest. This big time call buying many times is a sign that a big player is positioning for a big upside move in the stock and using options to leverage the position.
It also boosts the implied volatility (IV) of option prices. The current IV stands at the 32nd percentile while actual, or historic, volatility (HV) is only at the 14th percentile. This favors option selling strategies when constructing trades.
Stock traders may want to buy CVX stock and sell the Dec $125 calls for a $115 net debit. This covered call trade captures the rich 4% dividend while bringing in an additional 5% in option premium. Option traders may want to sell the Dec $115/$110 put spread for a $1.80 net credit. Maximum gain is $180 per spread with maximum risk of $320 per spread. Return on risk 56.25%. The short $115 strike price is structured below the $116 support area and provides a 5% downside cushion to the $121.01 closing price of Chevron stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in receiving finding out more about unusual option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.