For some Exxon Mobil (NYSE:XOM) shareholders Monday’s selling pressure looked par for the course in a challenging year. But for contrarian-minded investors with an eye on 2021, XOM stock looks ready for risk-adjusted exploitation using a modified spread for long stock exposure.
The last day of the November calendar was weak one for the Dow Jones Industrials as the blue-chip average shed just under 1%. But a monthly return in excess of 11% and record highs challenging “Dow 30,000” are better reminders of what Wall Street has been “mostly” up to in more than a few market averages and stocks. And that includes Exxon Mobil for the first time in a long while.
On Monday, shares of XOM tumbled by a significantly larger 5% compared to the bellwether. But the oil and gas giant also finished the month with a market-beating gain of nearly 20%. However, that’s also where the similarities for the former Dow constituent and index radically diverge.
It’s not a secret that prior to being replaced in the Dow Jones by software giant Salesforce.com (NYSE:CRM) in August, XOM stock was a dog of a stock in almost every sense of the word. Not only was XOM’s all-time-high set back in 2014, but shares have been cut by more than half since that time on a dividend adjusted basis. Bow wow! That’s not the worst of it though.
Entering 2020, Exxon Mobil shares were sending out R.S.V.P’s to income investors. The Dividend Aristocrat was only second to specialty chemicals manufacturer Dow (NYSE:DOW) on the index’s “Dogs of the Dow” list with a mouth-watering yield of 5.12% at the end of 2019. It was a trap and not the typical kind where an attractive-looking dividend is unsurprisingly cut or eliminated altogether.
Today and aside from having said goodbye to the Dow Jones, XOM’s year-to-date performance shows a whopping decline of 45%. And that dividend? Despite supermajors Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A) and others all taking defensive action and making tough decisions to reduce shareholder income, Exxon has stood pat. As a result, the stock now fetches a yield approaching 9%.
Personally, I’d be impressed if XOM stock maintains its quarterly distribution of 87 cents. But I’d find more relief if management would instead follow its peers and reduce the payout. And I may not be alone in thinking that.
Behind Monday’s outsized selling pressure, Exxon announced it will take a fourth-quarter charge of up to $20 billion as it looks to prioritize advantaged portfolio opportunities and further ensure its ability to “maintain a reliable dividend.” The thing is, XOM isn’t about servicing widows and orphans at this juncture. More appreciatively and taking the other side of Wall Street’s increasingly loud chorus singing the praises of alt energy, the company’s shares are no longer about a stock in decline either.
XOM Stock Monthly Price Chart
Source: Charts by TradingView
Wall Street has been dead wrong on occasion. It wasn’t too many years ago when the bullish mantra of “Peak Oil” resonated with investors. Sure, dye-in-the-wool alternative energy advocates will tell you this time is different. And to be fair, a company such as Tesla (NASDAQ:TSLA) is certain proof of real progress.
Still, oil remains everywhere, even in our toothpaste. And from a contrarian vantage point, XOM stock looks compelling as an investment. What could be more poetic than Exxon turning into a Comeback Kid story under a much less-friendly Biden White House after hemorrhaging during the fossil-fuel cozy administration of the last four years?
Technically, the monthly chart also points at a meaningful bottom, which could produce outsized absolute and relative price strength. While November’s performance was solid, a stochastics-backed, double-bottom pattern confirmation formed off Exxon’s March novel coronavirus low suggests larger gains are in the offing.
With XOM’s November high faltering just below key long-term trend and Fibonacci resistance, price action will have to clear the area from around $42 – $45 before a much larger move towards the stock’s post-Covid high near $53 or greater can be mounted. As such, and in recognizing equally large downside pattern exposure of around $8 to $10 in XOM shares, I’m favoring an out-of-the-money, modified long call butterfly.
Specifically, the Feb $42.50 / $50/ $55 call combination for 70 cents looks interesting. Risk is contained at less than 2% of owning XOM stock. That’s favorable given Exxon’s volatility. Also, this strategy begins to build intrinsic value as shares work their way past overhead resistance with a max payout of $6.80 possible if Exxon settled at $50 on February expiration.
Lastly and unlike the symmetrical structure typical of this type of spread, if investors turned really positive on shares in a hurry, this butterfly’s varied wing structure ensures a guaranteed profit of $1.80 per spread above $55.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.