Exxon Mobil (XOM) is one of conservative man's favorite stocks. The stock's price is usually so stable that index funds experience much larger swings than this company. Even during market crashes when the market loses more than half of its value, Exxon still preserves most of its value. This is why, whenever Exxon Mobil sees a plunge it excites many people wanting to either get in or increase their shares, even though Exxon's plunges are a rare thing and they take a while to complete.
Last time Exxon traded for below $80 was in December when DJI was at 11,700 and S&P 500 index was at 1,200 points. Today, both indexes are well above their December value. The biggest reason for Exxon's recent plunge is probably the recent plunge in the oil prices. Of course, this plunge is a function of slowing world economy. Even countries like Brazil, India and China are having trouble maintaining growth as we speak.
In the long run, there is strong correlation between oil prices and Exxon's share price. Similar correlation can be also found between oil prices and other oil producing companies. Still, Exxon Mobil is holding up pretty well compared to how oil has been performing lately. In the last 3 months, oil price is down by 20% whereas Exxon Mobil's share price is down by only 10%. In the last 6 months, oil prices plunged by 15% whereas Exxon Mobil's share price remained flat. As the oil price nears bottoming in the short term, Exxon Mobil -along with other oil companies- might be ready for a bounce back up.
Despite its dependence on oil prices, Exxon Mobil is a must have for every portfolio. The company is very stable, has been raising its dividend payments every year for more than 30 years, sits on rich reserves of cash and oil, has a lot of political influence and the company will definitely be around for longer than I will. The recent plunge has taken Exxon's P/E ratio to 9.5 and its dividend yield to 2.90%. I believe that $78 is a strong support point for Exxon Mobil as the company's stock price plunged to this level multiple times but didn't fall any further during December of last year.
Exxon generally has a good history of safety. It is very difficult for a major oil company operating in the least stable parts of the world (either environmentally or politically or both) to go many years without a major incident and Exxon has an impressive record of doing that. The company has a very conservative leadership, which also explains why the stock price has been very stable over the years compared to the rest of the market.
In the long term, oil prices will go up sooner or later as the world population and energy demands go up but the oil reserves go down. Of course, the new technological advances will make it possible to extract oil from environments that not possible years ago, increasing the available reserves for a while, however the oil reserves in the world are limited and non-renewable at the end of the day.
In 2012, Exxon is expected to earn $8.00 per share and in 2013 it is expected to earn $9.10 per share. If we assign the company forward P/E ratio of 12, we are looking at a share price of $96 at the end of this year and $110 by the end of 2013. This indicates an upside of 25% this year including dividends. Obviously this is a great rate of return for a very safe and stable company. A possible conflict in the Middle East may drive the share price even higher as it will drive oil price higher. Also keep in mind that the company has huge reserves of natural gas and as the natural gas prices recover, the company will benefit greatly from this movement.
I believe that everyone should own at least one energy stock as the energy demand keeps increasing globally. Exxon is one of my favorite energy stocks due to its safety record, rich reserves, conservative leadership and good return on investment. The company has been very generous to me in the history and I'll use the recent plunge to increase my shares in the company.
Disclosure: I am long XOM.
