We are at an interesting point in the market right now. The DJIA and S&P seem bound and determined to breach their all-time highs, and investors as well as fund managers are buying every dip in equities right now. However, the economic data is mixed at best. Housing continues to recover, and it has been a solid earnings season. On the downside, consumer spending will come under pressure from recent tax hikes, high gas prices, and the expiration of the payroll tax holiday.
I am getting more and more cautious on the overall direction of the market over the next three to six months. Given that, it is time to revisit an old blue-chip friend that I have had in the income and value portion of my portfolio for some time: Conoco Phillips (COP). The stock has a high yield and reasonable valuations.
Here are some recent positives for ConocoPhillips:
- The company announced it was going to invest less in LNG and oil sands and divert those capital budget outlays into developing shale assets. This move is long overdue and should result in better production growth over the next several years. It is also raising some $12 billion in planned asset sales to invest in growing its North American production.
- JPMorgan just raised its price target from $70 from $64 on the shares.
- The company is gradually restarting China's largest offshore field, which it owns a 49% interest in.
Note: Warren Buffett owns 24 million shares of ConocoPhillips, for value investors who like to invest along with the Oracle of Omaha.
Here are four reasons why COP is a good value play at $58 a share:
- The company has an A-rated balance sheet, the stock yields 4.6%, and has more than doubled its dividends over the past seven years.
- Despite the yield, COP sells for under 11 times this year's expected earnings.
- The stock sells at roughly five times operating cash flow (OCF). This is a discount to other major oil companies such as Exxon Mobil (XOM) (7.5 times OCF) or Chevron (CVX) (just over 6.5 times OCF), while paying a higher dividend than either.
- After shrinking this year due to the spinoff of Phillips 66 (PSX) last year, revenues are expected to grow just under 10% in FY 2014.
Disclosure: I am long COP.