Following Chevron’s (NYSE:CVX) recent earnings confessional, and with other extreme actions off and on the price chart out of the way, shares are set up for a brighter-looking future. But with market volatility and impact from the novel coronavirus still a concern, more secure exposure in Chevron stock is a two-step process. Let me explain.
Warnings aren’t the type of forecast investors generally wish to hear from a company. But under the right circumstances on Wall Street, it may also be part of finding a longer-term bottom. This appears to be the situation building in shares of oil and gas giant Chevron.
In early May amid crude oil hitting multi-decade lows on Covid-19 demand worries and global physical storage shortages, Chevron issued its first-quarter results. The report included massive cuts to production and spending, as well as a suspension of its buyback program to prepare for an acknowledged “very, very tough quarter” ahead.
The guidance sounded bad. Moreover, continued aggressive and difficult business decisions from the U.S.’ second largest energy player behind ExxonMobil (NYSE:XOM) and third largest globally, are part of a familiar conservatism that’s served Chevron well. That includes the company’s clean balance sheet.
Entering 2020 Chevron sported the strongest debt-to-capital and equity ratios among sector supermajors. That’s good for shareholders. As is the fact management’s cumulative tactical actions mean the energy company’s attractive 5.5% dividend is well-supported and removed from conversations of needing to be cut.
Chevron Stock Monthly Chart
Source: Charts by TradingView
Despite Chevron’s admirable job to date of navigating a historically difficult operating environment, shares of the blue-chip aren’t the kind which widows and orphans can take for granted.
On the price chart, Chevron’s volatility in 2020 has been dizzying. At their worst shares dropped nearly 58% from their early January high. Likewise, since hitting a low on March 18, CVX is up nearly 79%. And those fierce and countering price swings have established what appears to be a longer-term, but very volatile bottom.
Technically, the low in Chevron has successfully tested a pair of key Fibonacci supports. Specifically, shares retraced 62% of its uptrend dating back to 2003 and 76% of the rally tied to the 2008–2009 financial crisis. The well-oversold price action is now offering investors a bullish stochastics crossover and an inside candlestick formed in April to act on.
My suggestion for buying into Chevron more safely is to purchase shares if a rally through the April high of $95.74 confirms the potential bottom. With the stock near $93 the signal is less than 3% away. And in today’s volatile market, that could happen in the blink of an eye.
My other advice given what has been discussed is to buy shares as part of a collar strategy to capture upside potential and Chevron’s dividend yield with more secure, risk-adjusted confidence. The long stock, long put and short call combination allows for bullish profit participation on the upside. It also offers a definitive line in the sand in the event of a larger draw-down in Chevron stock.
A collar strategy on Chevron can be flexible or adaptable as well. Investors can adjust the option hedges over time. This means riding a bullish trend without capping the returns is possible. It also allows for buying or accumulating shares on weakness with defined risk and potentially a much stronger cost basis given the strategy’s protective value.
For now, put Chevron on the radar. And if the stock does cooperate just a ‘tiny’ bit, I’d look out to the September contract and see what the $85 put and $105 call are trading for to improve your chances of sleeping better and more profitably at night.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
