The stock of Exxon Mobil (XOM) has been breaking out nicely over these last several days as light, sweet crude is pushing up against $100 per barrel again. Here is a three-month chart of Exxon that shows the nice move in the stock since September:
When stocks move, it is very likely that other stocks in the same group are also moving in the same direction. During my 18 years as a professional money manager and stock analyst, I find that investors often fail to check out other stocks in the group to make sure that they are also looking at others that might be better.
Let's first look at a three-month chart of oil (USO) to see how much of a factor it is behind the move in Exxon.
As you can see, the rising price of oil is highly correlated with the recent move in Exxon, but Exxon is breaking out to new highs while USO is not.
Now, let's look at a chart of an ETF that is representative of the oil exploration sector. We will look at the iShares ETF that seeks performance corresponding to the Dow Jones U.S. select oil exploration/production index. The symbol is IEO:
I see a chart that is very similar to the price of oil. Again, Exxon has been breaking out to new highs, while oil and the oil exploration ETF have not. This is a good sign. Exxon is outperforming oil and its peers.
Now let's compare Exxon to some other similar oil exploration stocks:
Exxon has a better chart then Chevron (CVX). This could be due to the problems that Chevron has off the coast of Brazil lately, but Exxon has better relative performance than Chevron right now.
Exxon has a better chart than ConocoPhillips (COP), another one of its peers.
Just for fun let's take a look at one of my favorite Williston Basin plays, Georesources (GEOI).
This is a good chart too. Exxon Mobil is a $404 billion company that also pays a 2.2% dividend yield. Georesources is a $758 million dollar small-cap that does not pay a dividend. One is for older, more conservative investors, while the other one is for younger, aggressive growth investors.
Now let's take a quick look and see now Exxon has treated investors over the years:
Data from Best Stocks Now App
As you can see, the stock has treated investors pretty well over the years. The total return of the stock has beaten the S&P 500 soundly over the last 10 years. The S&P 500 has soundly beat Exxon over the last three years, however. Exxon has had a very good 12 months, but how much of this has been investors chasing dividend paying stocks? It should also be noted that Exxon held up well in 2008, with just a 13.1% drop, while the S&P 500 was down 38.5%.
Overall, when I compare Exxon against 2,700 other stocks in the market, it only gets a "C" grade as it relates to performance. I like to buy "A" rated stocks in the accounts that I manage.
Now let's take a look at the valuation of the shares of Exxon Mobil.
Data from Best Stocks Now App
It would appear that with the ravenous appetite for dividend paying stocks over the last 12 months, that the stock has gotten way ahead of itself from a valuation point of view.
Exxon Mobil is expected to earn $8.36 per share next year. The consensus growth rate over the next five years is 8.75% per year. At that rate, Exxon would be earning $11.69 per share, five years from now.
When I look at the current PE ratio of the shares (10), the PE range over the last four quarters (9-12), and the average PE ratio over the last 10 years, I choose a multiple of 10.5 to calculate a five-year target price of $114.42 on the shares. I also add in the returns from the dividends to come up with just 47.7% total upside potential over the next five years.
I like to buy stocks that have a good performance grade and 80-100% upside potential over the next five years. Exxon falls short on both counts. I warn all of you that are chasing dividend paying stocks like Eli Lilly (LLY), Bristol-Myers Squibb (BMY), Pfizer (PFE), Kinder Morgan (KMP), etc., that these stocks are getting overdone from a valuation point of view. Now when I take into consideration Exxon's performance, value and safety, I only get an overall grade of "B." I would not be a buyer of the shares here, nor would I sell my shares if I owned them. Overall, Exxon is ranked at number 1,234 out of 2,678 stocks.
Now let's look at Georesources and see how it compares with Exxon Mobil, as it relates to performance, valuation and safety.
Georesources is a $745 million market cap company (small-cap), headquartered in Houston, Texas. It is engaged in oil and natural gas exploration and production in the Southwest, Gulf Coast and the all-important Williston Basin areas of the United States.
Let's begin with an examination how the stock has treated its investors over the years, remembering that it is a stock better suited for those who have a risk tolerance for aggressive growth.
As you can see, the stock has delivered some spectacular returns over the last one year, three years, five years and 10 years. Not only has it clobbered the returns of the S&P 500, but it obviously has handily beaten the returns of Exxon Mobil by a wide margin. It is a higher risk stock. It should be noted, however, that Georesources was only down 3.4% in 2008, while the market was down a whopping 38.5%.
Overall, Georesources scores a momentum grade (one year or less) grade of "A," and an overall performance grade of "A." Now, you are talking my language! What about valuation? Is this just one more case of a high-flyer that is trading at ridiculous multiples, ready to come crashing back down to earth?
Let's look at the current valuation of Georesources, just like we did with Exxon Mobil.
Georesources is expected to make $1.95 in earnings next year. They are expected to grow those earnings by 23.5% per year over the next five years. At that pace, the company would be earning $4.54 per share five year years from now. In this case, I am using a more generous multiple of 12X, because of the superior growth rate that Geosources is capable of.
This gives me a five year target price of just over $54 per share. Georesources does not pay a dividend, so we do not need to factor this in. I come up with 82.7% upside potential over the next five years. This gives me a value grade of "B." But when I take into consideration the performance of the stock, I get an overall grade of "A." Grade A stocks represent the top 7-8% of the 2,678 stocks that I cover in the market.
Georesources is currently ranked number seven overall. Again, I would be very careful of dividend paying stocks that have been run up the flagpole as of late. No tree grows to the sky, and I find that many of these stocks are currently way overdone. I like Geosources for aggressive growth. Lastly, I never make any one position more than 4-5% of my overall portfolio.