As the drama in Europe is still being played out on a daily basis, there is a new player coming onto the scene. Its ugly head is out, and is about to bite the American consumer and the global economy. The villain that I am referring to is the price of oil.
On Monday, the price of oil jumped above $103, and the AAA national average of gasoline is at $3.565 per gallon. Over the past month alone, the price of gasoline has jumped over 5%. There are definitely inflationary pressures that are creeping in as electricity and food cost have increased, and this will put headwinds against this mediocre economic growth.
As a result of high fuel costs, there are great opportunities for investors to play this situation. The obvious play is to put money into the Oil & Gas Industry.
The first company that we should consider is Exxon Mobile (XOM). For the past year, XOM shares have only increased by a 0.21%, well below the S&P 500 yearly change of 3.48%. Even though XOM's share performance has been pathetic in the past 52 weeks, there are a lot of strong fundamentals to look upon favorably.
XOM is trading at 10.2 P/E and at 9.52 Forward P/E. The stock is fairly price at this level. The company operations are running efficiently as XOM is at 15.06% operating margins in the past twelve months. The company's management has done well by making money for shareholders as its ROE came in at 26.81% for the past year. We can add that revenues and earnings are still growing during this tough economy. The best part of XOM is that its yield is set at 2.20%.
Another play is British Petroleum (BP). BP has done well in the market as compared to XOM, as BP has gained 1.25% in the past 52 weeks as compared to the S&P 500 (3.48%).
BP is trading at a 5.9 P/E and at 7.12 Forward P/E. The stock price is cheap at this level, but there still remains risk resulting from the Deepwater Horizon tragedy. BP operations are not as strong as XOM, as the company's operating margin was 10.30% for the past twelve months. The company is doing a great job in managing earnings as its ROE came in at 24.89% this past year. Another strong fundamental is that BP is growing its revenue (25%), and the company's earnings per share have grown at a blockbuster pace (consider that it reported a loss in 2010) this past year. Its current yield sets in 4.00%, and what is promising is that BP has increased its dividend by 14% this past quarter.
Chevron Corporation (CVX) is another company we can look at. CVX has outpaced the S&P 500 for the past 52 weeks by gaining 6.32%, as compared to 3.48% in the S&P. CVX is trading at a 7.9 P/E and at 8.08 Forward P/E. CVX is fairly price at this level. Its operating margin is slightly stronger than XOM, as its margin is set at 18.78%. The company is also making money for shareholders as its ROE came in at 23.75% for the past year. Revenue continues to grow (23%), but at a slower rate as compared to XOM and BP. CHV continues to increase its earnings Y/Y, as it earned 37% more from a year ago. CVX current yield is 3.00%.
Three stocks have been presented here with a brief overview of company performance and trading valuation. Now we must decide which one out of three stocks will be a good play to add to your portfolio. All of them should be considered, but BP should be favored above them all and added to your portfolio. Even though it is still recovering from the Deepwater Horizon tragedy in 2010, the company is getting stronger (revenue and earnings), and as of Friday's close it is trading at 5.9 P/E. The stock is 3% off its recent 52 week high, but there is definitely some more upside potential to hit $52.38 (a 10% gain from current price) by the end of the year.
The company just reported a blockbuster fourth quarter result by earning 73.13% over the past four quarter results. BP earnings growth has outpaced its historical growth rate, and the company just increased its dividend-- these both show promise. The risk to BP is the unknown costs related to the Deepwater Horizon, but BP is taking steps to reduce its liability to the tragedy. This will relieve the pressure on the risk and it should boost its earnings. BP is definitely an income and growth play.