Do you own the world's biggest oil company? Of course I'm talking about Exxon (NYSE: XOM) - and odds are if you've invested in a mutual fund or broad index, you do own Exxon.
But what if you could go back in time and buy Exxon in 1996, at under $20 a share? Nearly 15 years ago, Exxon had yet to merge with Mobil, the largest industrial merger ever. But they were still a huge company with a long track record of profits.
Buying Exxon Mobil at $20 a share would let you lock in a near-triple at the company's current share price of nearly $60. Okay, so a triple over 15 years isn't going to sail any ships.
In any event, time travel isn't possible - at least backwards time travel. Unless..
Take a look at this 20 year chart below, which plots the price of one share of Exxon divided by the price of one ounce of gold.
You can see that relative to the price of gold, shares of Exxon are as cheap as they were in mid-1996. I like to use the price of gold as kind of an x-factor to scrub out asset price inflation, dollar inflation and even stock market inflation. Does doing so give us a perfectly re-calibrated valuation picture? Of course not, but it's more than just an interesting exercise - comparing stock prices relative to the value of gold eliminates the effects of monetary policies. That's important when we consider all the 'noise' that affects the dollar (the world's reserve currency).
That's because gold tends to hold its relative value over long periods of time better than almost any other asset. So comparing gold to any other asset over a given period of time gives you a relatively stable yardstick. Using gold as a denominator scrubs out much of the inflationary noise in the markets, and lets you compare asset-to-asset without having to worry about the abstraction of currency movements.
So back to the chart: if you believe as I do that gold is a stable store of value, then it's much more useful to look at the above chart as a tool to decide the relative value of Exxon than the 20 year stock chart below:
If you look at this chart alone, you might come to the conclusion that Exxon is currently selling near its 5 year average, which isn't necessarily a bargain.
But my first chart tells a slightly different story- that the world's largest oil company is selling at its 15 year lows, even though they've done nothing but grow profits and market share in that time.
Oh, and they've grown their dividend payments as well:
This chart only includes up to 2008, but the dividend has since increased another 20 cents a share, up to $1.76, with a yield of 2.9%.
That's almost as good as the current 10-year Treasury, but Treasuries prices are currently near their all time highs- well off their 15 year lows.
With a trailing PE under 14 and a forward PE under 9, you're not likely to see Exxon sell this cheaply for much longer. I certainly don't expect this company to be this cheap - valued in gold or not - in another 15 years.
If you don't own any shares of Exxon, you should, and now is the perfect time to start building a position.
Originally published on July 21, 2010