There is a storm raging right now, and it is affecting the oil companies in the gulf. But it’s not Hurricane Laura. Oil stocks are stuck in a whirlwind that has taken them down to but a sliver of what they were as recently as 2017. They were down about 2% on Wednesday, while NASDAQ Composite and the S&P 500 were setting astonishing records. There is an insatiable appetite for equities, but it doesn’t include anything in the energy sector.
Overall, they have been toxic for investors especially since 2019, as oil stocks have not yet stopped falling from the correction that started in October of 2018. And now, they linger about 50% below that high watermark. That said, investors should give up on the idea of recovering old glory. The investment thesis in oil stocks merely shifted directions, and they are now dividend income investments not for growth.
Moreover, this week we saw the end of an era, as a once giant was booted out of its listing in the Dow Jones Industrial Average. I suspect they wanted to bring in fresher concepts, like technology and healthcare. These are two major winning themes of 2020 because when the quarantine first hit, Wall Street investors panicked and they sold everything. But shortly thereafter, they fell in love with the idea that technology will benefit greatly from the social distancing fears that still linger.
Additionally, they also chased healthcare stocks because they were to be the heroes to bring us vaccines and therapeutics to combat Covid-19. These two segments have had monster rallies since they bottomed and have exceeded their February highs. In fact, the Invesco QQQ Trust (NASDAQ:QQQ) and the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) are 70% and 45% — respectively — off their March bottoms. It is truly the classic story of the haves and have nots, and energy stocks are most definitely part of the have not gang.
Nonetheless, oil stocks have been under fire even before the global shutdown for social reasons. In fact, environmental, social and governance (ESG) is all the rage — and they are becoming just like tobacco stocks. Also, Saudi Arabia waged a price war against Russia and the United States right at the beginning of the pandemic. Heck. the crude oil price even crashed to a -$35 per barrel at one point; That’s how ridiculous things got. This is all to say that there was a perfect storm that hit the oil industry and it’s not likely to ever recover from it. Long gone are the days of $100 oil talk forecasts.
Now, though, let’s discuss the opportunity to invest in three oil stocks, but through a new prism. They are:
So, let’s dive in.
Oil Stocks to Buy: Exxon Mobil (XOM)
This week, Exxon Mobil stock was kicked out of the Dow to make room for more modern stocks like Salesforce.com (NYSE:CRM). This is the embodiment of the change that is occurring on Wall Street, and quickly. The sad part about it that in 2017, it was ranked the 10th most profitable company in the Fortune 500. And, it was one of the largest corporations on the planet as ranked by many — including the Forbes global 2000 list in 2016.
Clearly, though, much has changed in the last few years. And at the heart of the problem is the destruction of its income statement. However, this is not to any fault of its own. The whole sector is under fire, as is evident with the two other stocks were are discussing today.
Nonetheless, the opportunity here is that there is a difference between a fall from grace and the demise of the business. That said, XOM stock is not going away — it’s just coming out of the limelight and into the shadows. Often this is a blessing in disguise, and the investment in the stock going forward becomes a value trade rather than a growth one focused on growth.
Earlier this year, management publicly announced its commitment to maintaining the dividend. The stock price has fallen so low that it now yields a massive 8.7%. Now, they will need to either work on improving the stock price or recommit to not cutting the dividend; Or else investors will be leering of such high yield.
Meanwhile, XOM stock should find a bottom that would make for a healthy long-term investment income thesis. There are no other places where investors can get this much interest return without the need of capital appreciation. The only question, however, is the support levels on the chart below current levels. The stock has fallen into 18-year-old consolidation levels, so they should hold. It will take much worse news in order to break through that.
Chevron, on the other hand, remains in the index as it was before. I have long preferred CVX stock to XOM in previous write-ups just because it acts better under normal conditions. Case and point, it has held much better under duress — up 50% from its March lows, versus only 25% for XOM stock.
Now, however, I treat them both equally from the thesis perspective. Additionally, CVX stock now yields an impressive 6.1% in dividends. This management team also openly confirmed this year that they will defend it at all cost. They assured investors that they had enough cost cutting they can use to to keep their promise.
That said, the fundamentals continue to deteriorate as demand has not sprung back from the abyss yet. People are just not back to moving about like before, and it turns out that old habits are not that hard to break.
Between the Chevron and Exxon, CVX stock perhaps has further to fall than XOM stock. However, I would trust Chevron stock more at this time. They say that price is truth, and I see better action on this chart than the other. Investors would be more comfortable owning this one and completely avoidinf the stigma of a recent Dow Jones outcast.
The difference is not huge, but any advantage matters at this point.
Oil Stocks to Buy: Energy Select Sector SPDR Fund (XLE)
Of the three stocks in this article, XLE stock is the one I would not touch. Even though Chevron and Exxon make up more than 44% of this is ETF, it also includes a bunch of potentially problematic fringe companies that could be walking zombies. My investment thesis right now is to own companies that have a high dividend yield. I can trust Exxon and Chevron to do that, but I do not want to climb down the quality oil stock tree at this moment.
Overall, I usually chose an ETF over a specific stock investment when I want to avoid specific stock risk. But in this case, XLE stock would get hurt just as much in sympathy if either of the two companies cut their dividend. The price range in this one has been unusually tight, and this means that there is a move coming. The direction of which is a mystery, though, because it sits in the middle of the Covid-19 correction range.
That said, I want to trust the support above $79 per share — but with medium conviction at best. The triggers for the break outs are above $93 and below $79 for the next few weeks. Either breaches would carry momentum in that direction.
If stock prices don’t bounce soon, managements would be compelled to reduce the dividend amounts to lower the yield. But if they have indeed bottomed, then price can creep up and the yield would normalize naturally. Either way, these are income investments and not a trading opportunities.
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.