It’s no secret that the stock market is correcting hard as a direct result of the novel coronavirus. But for Exxon Mobil (NYSE:XOM), the problems start long before the outbreak. XOM stock peaked in 2014, and then continued to hit lower highs over a 5-year period. But that trend finally fell apart.
Why? Wall Street saw a sharp flip in sentiment. The consensus quickly became that fossil fuels are a thing of the past, so investors rushed to price that into equities. But in reality, it will take decades until fossil fuels are truly irrelevant.
That truth is clearly evident. From a fuel consumption perspective, the internal combustion engine is still the norm. Electric vehicles are making a run for it, in large part thanks to Tesla (NASDAQ:TSLA), but they are still far beyond.
XOM stock is not dead yet. And this dip is the perfect opportunity to buy some shares.
A Long List of Problems Plagues XOM Stock
As I mentioned above, Exxon Mobil’s problems are far from new. But when the world stopped driving and flying in March, fuel demand collapsed. This is an unprecedented — albeit temporary and self-imposed — scenario. Because of this, investors should be confident that the ramp back up will be abrupt, more so than after any prior drop in demand.
Fundamentally, XOM stock is cheap by any metric. That doesn’t mean it can’t get cheaper, but it does make a viable thesis to believe in a bounce.
Meanwhile, investors can benefit from the fat dividend it now offers. Both Exxon and Chevron (NYSE:CVX) recently expressed confidence in their financial positions. And this message was clear. The companies cut spending about 20% for this year and their dividends are safe.
If the market malaise continues much longer, there’s still more spending for them to trim. The logic here suggests that if there is a bounce in oil prices, XOM stock will help lead the charge.
Exxon Mobil Has Upside Potential
For the first time in a long time, the price of oil fell on actual fundamentals, not OPEC’s manipulation. However, Saudi Arabia started an economic war with Russia to manipulate the oil market.
The nation slashed its crude oil prices and flooded the market, expecting to bring Russia back to the negotiation table. But the Saudi plan backfired. Russia is happy to see U.S. oil companies suffer from extremely low prices.
Now, it’s a three-way war, and two of the parties don’t want to play. My bet is that the other OPEC members are starting to starve for cash and will soon pressure Saudi Arabia to quit its crusade.
Technically, the long-term breakdown occurred when XOM stock lost $64 per share. But there are better days ahead. Timing an entrance is difficult under normal circumstances, but the current volatility makes it even harder.
But the world still depends on oil, and Exxon Mobil is still one of the top companies. That makes XOM stock a buy at these depressed oil prices.
Bottom Line: We’ll All Be Driving Again Soon
This too shall pass, and the demand crash will reverse. I believe that in the next two months, much of the world will go back to work. Wall Street will let prices rise early.
Because of this, owning XOM stock on this gigantic dip makes a lot of sense. It sits at levels that are 20 years old, and it won’t stay this depressed for long. Betting on an oil exchange-traded fund is another popular strategy, but in this case, I would rather risk money on individual companies.
Plus, global central banks have lowered interest rates to zero and beyond. XOM stock’s dividend now yields more than 9%, which is far better than zero.
Sooner or later, the giant funds will start buying back into the very stocks they just sold down 70%.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
