Investing Wisely -- Energy and Bellwether Exxon Mobil are Looking Very Positive
My focus is "Investing Wisely", e.g. taking advantage of the bull / bear cycles as they occur within the overall marketplace. Integrating modern analytics within these cycles means maintaining a process of the thorough fundamental technical and consensus analysis of the many companies in my universe.
Within the Energy Sector this begins with high profile companies such as Exxon Mobil Corp. (XOM). I believe that this discipline provides the necessary clarity regarding the rotation that almost all companies goes through - from favorable times to unfavorable times and perhaps back again.
The current market capitalization of XOM is over 500+ billion, making it the number one largest company in the U. S., and Exxon Mobil Corp. is now the 2nd largest revenue producing U.S. company. However, it is by far the largest in the energy field with Chevron (CVX) and ConocoPhillips (COP) being second and third.
The company has had and continues to have excellent management that dominates its industry very well. It is clearly a very stable and consistent organization. Some may think that trading in a similar manner with the Indices (DOW, S&P, etc.) is wise. I disagree, with caveats. Over the past 10 years or so, it has not been a profitable place to have invested your money. This fine energy company continues to qualify as a "quality" firm. Keep in mind that there are other, often smaller, energy companies that have produced a far better ROI over recent years than Exxon Mobil Corp.
While earning estimates are on balance positive for Exxon Mobil Corp., there is still a consideration that is often overlooked: How will Wall Street reward or punish Exxon Mobil Corp. or any other company in the future? It appears, and by comparative analytics, to me that the upside for XOM is limited on the shorter term. The estimates that are presented are divided into two aspects of my valuation process. They are "now" and "later". These are my terms rather than a two year, five year, 10 year, etc., which is often the conventional approach. I believe valuations beyond a couple of years is reaching and often a waste of words and time. That is because valuations must be adjusted rather frequently as the cash flows and other fundamentals of the company change.
My analytics, to a large degree, have to do with comparative analytics. Comparing XOM with its peers and other top capitalization / revenue producing companies in general, provides a clear and modestly positive story of both Exxon Mobil Corp. and the integrated oil industry group.
Timely news includes the fact that lower projected earnings growth in the integrated oils will continue due to increasing consumption particularly in Asia but also globally will continue. This can perhaps be detected in the more recent share price of XOM and of several peers.
As a sector / industry group, Energy / Integrated Oil, and its component companies, are more recently difficult for investors to profit from. This is likely due to the revenue-dynamics and political interference that evaluations are often tough to figure. However, Energy firms in a negative economy are perhaps and will likely remain solid investments. Typically, at the bottom of an economic cycle, they can appear to have relatively high P/E ratios. However, when the economy improves and appears to be topping, the P/E multiple then tends to shrink. In XOM's case, if forward earnings slow P/E ratios will be on the rise.
This perhaps explains why many companies trade for high multiples (perhaps 20 or 30 or more - times profits) during bad economic times, and end up trading for less than ten-times profits when earnings growth having fully taken advantage of the improved economy.
So at this time, with regard to Exxon Mobil Corp. we definitely cannot and do not blame the economy. Exxon Mobil Corp. and the integrated oil industry group is doing very well to say the least.
My analytic focus (to invest or not to invest) on any company is most heavily weighted on fundamentals. Exxon Mobil Corp. appears to have the prospect of improving earnings. Consensus projections call for a small increase next year. For me, this is just a warning (something to consider) prior to buying. For prudent investing those earnings will have to remain strong over a quarter or two before I would consider it be a "wise investment". Relating XOM to its major peers, clearly most all should do just fine. 'Just fine' is good but not as good as - "very well" to "excellent'! I'm seeking excellence when I invest.
The "corporate governance" for XOM is: Board (low risk), audit (low risk), compensation (low risk), shareholder rights (low risk). These ratings are "right on" according to me!
As for the financial statements, all look very good, however nothing appears positive or compelling. In summary, Exxon Mobil Corp. revenue, operating income, net income and balance sheet all increased / improved, and appear to be on track. The most current earnings and revenue results have come primarily from a very high demand for oil and gas.
The price activity of Exxon Mobil Corp. moved nicely until November 2009. Since then it has declined from 73.3 to 56.2. I consider this rather large consolidation quite significant to my study. From the June lows of 56.2 it is now over 70. That's a big move for XOM. These numbers (prices) are an important consideration before making an investment decision to buy or short any security! That's a warning on XOM.
Fundamental Valuation / Comparative Analytics:
Table: O&G E&P
Exxon Mobil Corp. valuations, return on equity and price targets: My valuations uses XOM's current multiple (P/E):
|ROE -- (My Opinion)||PEG -- (My Opinion)|
|70.6||12.4||20.6-- (very low compared to previous years, but improving!)||0.98 --
|Fiscal Year||Est. Low / High - Price Target
Range (U. S. Dollars)
|Average Estimated Price
(U. S. Dollars)
from Current Price
|2010||70.2 / 75.0||72.3||3.3%|
|2011||71.2 / 93.0||79.2||13.2%|
|This Yr. / Next Yr.||Average Estimate||Low Estimate||High Estimate|
Valuating XOM to its Peers: It (XOM) will significantly under-perform. Therefore consideration of alternate and more competitive companies may be prudent.
Notes: Most financial analysts determine the price target range by estimating a future earnings per share and then applying a price-to-earnings "multiple", also known as the P/E ratio. I calculate price targets for both the current and next fiscal year by applying the stock's present multiple to the average professional analyst's estimate and then do some rather foxy tweaking.
Economically speaking there is always a concern or question as to what the U. S. Federal Reserve Board may or may not do regarding the management of the economy. Now that elections are over we know and history confirms that little is done proactively until maybe early next year. We also know that rallies have come when the Fed injects capital or a fiscal stimulus into the economic system, but that is becoming an "old news" factor. How this plays out over this post election period with the energy does not seem to have much effect on XOM's future growth.
We also know that XOM is a big player in today's global economic picture, something that is very important to take that into account before investing.
Technical Thoughts / Analytics
The General Market and many Companies are obviously on a tear but like all such things - that too will come to an end. So for the marketplace, the energy sector and this industry group it is too late to buy and too early to sell.
I remain 100% in cash and am waiting for a Bearish Inflection point to take new positions. That may occur in a couple of weeks or perhaps sooner. The internal topping action is continuing. However, this past week was on balance very positive. That's good if you are forecasting a near-term top. So for this old bearish fox (technically speaking) I'm pleased with the statistics, indicators and charts.
For a current (up to the minute) chart of the Oil & Gas - Exploration & Production and several other industry groups see and then scroll down:
Should you be seeking near-term or perhaps longer-term market guidance / direction, please feel free to Email me, and I will respond promptly.
So while the general market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may be also being wise.
I believe a correction is coming, and soon. When it does arrive, it will likely have a negative effect on Exxon Mobil Corp. and many other securities in the Energy sector. So, the second question is always WHEN - for both rallies and corrections? The answer to that question is one that we can be sure of: There will be future rallies and pullbacks as the marketplace cycles. You can easily confirm this by simple looking at historic long-term charts of the stock market itself or just about any company or ETF.
The point is that indices and securities all go through "cycles" in one manner or another. Typically, when over-extended prices occur, they turn down. The opposite is also normally true - when over-contracted prices occur, they turn up. The trick is to have a methodology in place that both take advantage of these facts and also offers a consistent and a high probability of profitable - future investment decisions. That's why I have always started my analytics with detailed fundamental analytics of high profile companies like Exxon Mobil Corp. I believe that, XOM and its present fundamentals continues to be an excellent leading indicator for the Energy sector.
It is important that this article be viewed not as a recommendation for the purchase or short sale of Exxon Mobil Corp. Favorable to the process of "investing wisely", it is intended to suggest that its sector and sub industry groups has both positive and negative companies and ETFs (components) to consider when making investment decisions.
XOM, within my analytics, is just an excellent "bellwether" company to help identify candidates for buying and candidates for short selling as the marketplace cycles from bull to bear and back again over and over and over again. Thus, we are presented frequent and conservative opportunities to invest or to simple hold cash.
The good news about the current marketplace is - we are presented frequent and conservative / low risk opportunities to invest - Long, invest - Short or to simple to hold cash. For me this plus watching the Bottom Line is "Investing Wisely".
Source & data information: BarCharts, Bauer Capital Management, Bloomberg, CNN Money, Fortune, MSN Financial, RiskMetrics Group, SafeHaven, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden
My Current Bottom Line:
* I am holding 100% Cash.
* Patience and Discipline - waiting for my list of Fundamental, Consensus and Technical - "Conformations" to all fall into place is part of the necessary process for "Investing Wisely".
* Inflection Points historically have occurred historically about three - five times per annum. We have already had 5 clear and meaningful Inflection Points so far this year.
* In my late August posting, I said: "The Market is now (very possible) setting up for another meaningful but likely (short in duration) Rally!" It certainly did rally.
* Now it looks just the opposite. One of these days this choppy and bifurcated market (late April to date) will do something meaningful and the next possibility of that is a Pullback.
* High Volatility may not currently be showing up on VIX - lately, but it is clearly - alive and well.
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Smile, have Fun - "Investing Wisely",