During the four weeks leading to November 15, 2012, Chevron (CVX) fell from its all-time high ($118.53) to $101.62. The decline from the peak was initially triggered by a warning that the Q3 results would be significantly lower than the Q2 results and possibly by a negative decision of the U.S. Supreme Court, which denied a bid by Chevron to block an $18.2b judgment against the company in a long-running pollution case in Ecuador. Subsequently, the stock price fell steeply and seemed to discount the imminent Q3 results in the three weeks that led to the earnings announcement but, surprisingly, the decline continued even after the earnings announcement.
Now, in the last three weeks, we have been witnessing the opposite scenario. On January 10, Chevron reported a positive interim update, stating that the Q4 earnings will be notably higher than the Q3 earnings thanks to increased output and higher prices. Subsequently, in the last three weeks the stock has risen about 7% and is just a breath away from its all-time high. The big question is whether the stock will record a new high after the earnings announcement this Friday. I believe the stock will record new highs for the following reasons:
1. Technical picture
The stock traded in a well-defined range ($90-$110) for almost two years and broke above that range last summer. There is no more reliable technical indicator than a breakout from consolidation. A breakout usually means that the fundamentals have changed and the stock is ready to trade in a different range. Moreover, the longer the consolidation period and the period of trading above the breakout level the more reliable is the technical signal. As described above, the stock fell back within the range for one month but then it returned above the old range. I have learned from experience that this pattern rarely fails and I would rather place my bet with the odds in favor of me.
I described the exceptionally strong fundamentals of Chevron in detail in my previous article, in which I wrote "The P/E ratio would be compelling for smart money to heavily invest in Chevron at such low valuations (then $105). A reasonable target for the next 12 months is $130, which corresponds to a modest P/E of 10." In this article, I will just list the key features of Chevron that render it an exceptional company. For more details, please refer to the previous article.
The company has a great record of earnings growth. In every peak or bottom of the economy the company achieves much greater earnings compared with the previous peak or bottom, respectively. In addition, the company has managed to double its equity approximately every five years, which is a proof for its increasing value over time. The proven growth record of the company and the low P/E (9.6) constitute the ideal mix for a profitable investment.
Chevron has cash $21.5 B and a net debt of about $50 B, which is about 2 years' earnings. It is very rare to find a company that can grow so consistently without raising its debt. This reveals sound management and is also a safeguard for any sudden economic downturn.
Chevron has increased its dividend for about 30 years in a row while it also maintains a low payout ratio (~28%), which guarantees future dividend increases.
I believe the time has come for Chevron to reach new highs. The mean analyst target for the stock is $123.55 and there are 5 "strong buy," 12 "buy" and no "sell" recommendations (out of 23 analysts). I believe we are watching the exactly opposite scenario we saw in the earnings announcement of the previous quarter.
Disclosure: I am long CVX.