Exxon Mobil (NYSE:XOM), Universal Corp. (NYSE:UVV), and RPM International (NYSE:RPM) sold off with the broader market in Q4 2018. XOM and UVV have rebounded from their lows and are rallying; UVV is still consolidating its losses but is forming a solid base from which to rally. Investors should consider all 3 for their solid financials and rising momentum.
The Momentum Investor Explained
The purpose of The Momentum Investor is to find companies that have sold off and are now rising. The universe for this column is limited to dividend “aristocrats” – stocks that have increased their dividends for 25 consecutive years – and the 10 largest holdings of the following sector ETFs: the XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY, VNQ. All of these are large, well-established companies whose importance to the market creates a natural bid for their respective shares.
This column is at the mercy of the market. If the market is in a severe correction, it’s unlikely any of the companies will be attractive. Conversely, if the market is rallying strongly, it’s possible that a large number of companies fit the general criteria. In that event, I will exercise editorial discretion as to how many companies are covered.
Company analysis focuses on the financial statements in the following order: cash flow, balance sheet, and income statement. I use Morningstar for all financial statement data. Because the universe of stocks contains large companies, revenue growth probably won’t be that impressive. What’s important is the amount of cash each company generates along with the strength of its balance sheet. Because most of these companies are large, well-established, multi-national companies, the most reasonable expectation is for revenue growth equal to GDP growth; anything faster is icing on the cake.
The General Economic And Market Backdrop
Momentum plays are more likely to succeed when the economy is growing and the markets are rising. The economic backdrop is moderately concerning. I have a 25% recession probability in the next 6-12 months. This is not fatal but should be included in the overall investment analysis. The general market backdrop is positive. Please see my regular Technically Speaking column for a deeper analysis of the markets.
Stocks in Focus
Let's look at the dividend data from Dividend.com
The 10-year is currently yielding below 3%, giving XOM a clear advantage in the yield comparison. The payout ratio is 71.3%, which indicates a fair amount of safety. This is a company that rewards stockholders; dividends have increased for 36 years.
XOM is a cash register. Since 2013, the least amount of cash they have generated after subtracting payouts for investments is $6.5 billion. This gives it maximum flexibility to manage its finances. XOM issued a large amount of debt while rates were ultra-low; it sold nearly $46 billion in new debt since 2013. It repaid about $13 billion in the last two years. Its balance sheet is rock-solid with a book value is $167 billion.
Not only is XOM an aristocrat, it is also one of the 10 largest members of the XLE ETF, which is currently improving relative to the SPY.
Finally, let's look at its chart:
XOM sold off with the broader market at the end of last year, falling from the lower 80s to the mid 60s - a fall of slightly more than 20%. Prices have since rallied. They have made two moves higher - the first in early January and the second at the end of January. Prices are above the 10, 20, and 50-day EMA. All the shorter EMAs are rising, as the MACD. This is a very nice chart that bodes well for the next few months.
Like most aristocrats, UVV is self-financing; their cash flow from operations is more than sufficient to pay for all capital expenditures. In fact, it's usually 3x-4x larger giving it maximum financial flexibility. It usually has EBITDA of over $200 billion while their dividend payments have been between $55 and $62 billion. Turning to the balance sheet, book value (assets-liabilities) is currently $1.3 billion while the debt/asset ratio is 19% (this figure includes short-term debt).
The company is a member of the consumer staples sector, which is currently falling relative to the SPY. However, the company's high yield is bound to attract yield-hungry investors.
The company's chart is attractive: The stock fell with the rest of the market at the end of last year. The absolute drop was 30%. It has since been rising modestly; the stock has a slight uptrend since the beginning of the year. The EMA picture is neutral; the shorter EMAs are moving sideways while the longer EMAs are moving slightly lower. Prices are still below the 200-day EMA. The real key to this stock is the MACD which has been consistently rising since the beginning of the year.
RPM is a dividend aristocrat. From Dividend.com: Its yield is below the 10-year treasury, which means investors will need some capital appreciation to obtain gains above the current safe interest rate. The payout ratio is very safe. Dividend increases are clearly a core corporate value, as the company has increased dividends for nearly a half-century.
RPM generates ample cash from current operations to fund ongoing investment. With the exception of 2015, the company's cash from operations was higher than its cash spent on investments. EBITDA has fluctuated between $458-$650 billion while dividend payments have been between $124-$176 billion. This should give investors an added measure of safety. The LTD/asset ratio is 41%, a conservative measure.
RPM is a member of the basic materials sector, which is currently improving relative to SPY. However, its current trajectory on the RRG table is weak. This explains why the individual stock chart is so important:
RPM fell 22.5% when the market sold off at the end of last year. Prices hit a bottom in the lower 50s and have since rallied about 15%. They are currently in an uptrend. They hit resistance at the 200-day EMA and have since fallen back to the trend line. The shorter EMAs are positive while the longer EMAs are modestly bearish; this, however, is standard when a company is rebounding from a selloff. The MACD is rising, indicating growing positive momentum for the stock.
All three companies above have one thing in common: rising momentum. That means this is a good time to consider adding them to your portfolio.
I don’t have a professional relationship with any reader, nor should this column be considered specific investment advice for any individual. Please do your own homework to make sure the investments discussed are within your individual risk tolerance.
Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.