A wise man once told me that you only make money on a trade when you sell a stock. He was passing on some time-honored advice to a young trader. I do like dividends but I never overlook capital gains as well. So while I do buy and hold stocks I like to know when I'm going to sell them, if ever. I might never sell my Coca-Cola (KO), but I will be selling Chevron (CVX) if I can get in at a good entry point.
I last bought Chevron at a steal of $55 per share and sold it, after years of great dividends, for something in the $110 range. It was a great trade. I wish all trades worked so well. If I can get Chevron in the 50s again I will be backing up the truck for sure.
Chevron is an awesome energy company. Energy is a huge part of the economy and important to investors. For the most part the demand for energy is in-elastic. Small demand changes go along with drastic price swings. This is not surprising because of the tight supply and the physical nature of the product. Personal disposal income gives us a nice window into the these market actions. This chart is a momentum chart and downward slopes show income growth slow downs, and dropping below the zero point is contraction of income.
*Chart from ycharts.com
RED is personal disposable income. BLUE is WTI crude. ORANGE is Chevron stock.
I would like to point out the extended downward slope in disposable income growth after the huge spike in oil prices in the 2008/9 time frame. Right before the decline in 2008 income was rising very quickly. It may be a case of the chicken and the egg on which indicator is leading. However, energy prices eat into disposable income in every way from the cost of gasoline to food. When energy is rising disposable income growth is under pressure. The huge drop in energy prices was a nice stimulus to the economy in the form of lower gas prices if nothing else.
In mid 2006 oil moved up close to $80. That price level pressured disposable income into a growth slow down. The 2007 bottom in oil prices may well have set up the super income growth period up to the crash in price. Tough to be definitive, but look at the chart during the last few years. The $80 WTI range is causing trouble again for disposable income growth. We are at a stubborn point for WTI sitting in the low $80s today and according to this graph oil must spend some time below this range in order to stimulate (or forecast) disposable income growth rate. This could be improved with an inflation bias but I'm not going that far with it; it is indicative as it is.
What does all this mean for Chevron? It adds another economic indicator to the evaluation of its price and upside price target. It's not a problem that it may be capped at a certain level, but that moves my entry points down. While the disposable income slope is down I don't see much chance of strong oil prices. Also, I see rising oil prices eroding income growth fast enough to upset demand and reverse the price of oil. That will cap the price of the super major oil companies like Chevron.
Chevron has compensated for all this the best it can. It has a huge share buyback program and a growing dividend. These are good things for investors, and the inflation bias will keep the long-term price bottom and tops moving up. In conclusion, Chevron (and other super major energy companies) has become such an important part of the U.S. economy that it is not able to transcend it.