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The two American oil giants, Chevron (NYSE:CVX) and Exxon (NYSE:XOM), are reporting their Q1 results this week, on April 26, and 25, respectively. The big question is whether one should buy their shares before or after their reports.

In a previous article on January 30, I recommended buying Chevron, predicting that it would record a new all-time high after repeatedly approaching its previous high. Moreover, three weeks ago I suggested that traders should prefer Chevron to Exxon, as the technical picture of the former (breakout from consolidation) was much more optimistic. Chevron indeed recorded a new all-time high, rising from $116.5 to $121.5, while Exxon was stuck in its old range. However, the follow-up was disappointing; Chevron is now back at $116, having underperformed Dow Jones by 5% during the last 3 months. Therefore, this proved to be an exception, i.e., the breakout proved to be a false technical signal.

The underperformance of all the oil stocks relative to Dow Jones has been at least pronounced this year. While Dow Jones has been consistently recording new all-time highs, the oil stocks have not tasted any of the recent euphoria of the stock market. To be sure, Dow Jones has outperformed Chevron by 5%, Exxon by 8%, BP (NYSE:BP) by 13% and Total (NYSE:TOT) by 20% during the above, shorter than three-month period.

The above divergence has resulted in the oil stocks having very low P/E ratios (around 9) while the rest of the stock market has an average P/E of about 16. Part of the underperformance of the oil sector is due to the recent collapse of the oil price, which has declined 10% in April. Nevertheless, the underperformance was quite prominent even before the collapse of the oil price. The reason might be the market perception for overabundance of oil thanks to the new, horizontal-fracture method, which will render the U.S. the largest oil producer in the world in the next few years (even though many American citizens have complained for the earthquakes and the water pollution caused by this new method).

In reference to the expected earnings reports of Chevron and Exxon this week, the analysts expect approximately the same earnings as those of last year. In my opinion, given that the two companies make 90% of their profits in the upstream sector, their earnings will probably turn out somewhat lower because the average oil price is almost 10% lower this year than that of last year's Q1. If you add the current ominous short-term technical picture for the oil price, the poor market sentiment for oil and the imminent general market correction, I expect the stocks of Chevron and Exxon to significantly decline in the short term. This will present investors a great buying opportunity, which should definitely be utilized. The two companies already trade at P/E around 9 and hence any decline from the current levels will present a great bargain.

Even if the results of the two oil giants exceed the market expectations, I believe that the spike in their stock price will be short-lived because the stock market just reflects human psychology and at the moment the investor community is full of pessimism for the oil companies. Therefore, I suggest that investors exhibit patience and wait for much better entry points to purchase shares of Chevron and Exxon.

Source: Should You Buy Before Or After Chevron And Exxon Report Their Earnings?