Why oil's free fall shouldn't keep you from Exxon, Chevron
Who would buy oil stocks with crude in free fall? Haverford’s Chief Investment Officer Hank Smith would.
Oil prices are down some 30% and counting since the summer. Brent crude is below $79 a barrel; West Texas Intermediate is down below $75. But according to Smith, that doesn’t matter, at least not when it comes to Chevron (CVX) and Exxon (XOM).
Here’s his logic.
In the decade of the 70s, oil averaged $10 a barrel. The annualized rate of return of Exxon was 19%. In the decade of the 80s, oil averaged $25 a barrel. The average annual return of Exxon was 17%. In the decade of the 90s, oil averaged about $18 a barrel. Exxon delivered about 14% annualized rate of return. And in the decade of the 00s – remember that decade of no return for the stock market – oil averaged $46 a barrel and Exxon delivered an annualized rate of return of 7%. This is a company that delivers for shareholders regardless of what the price of oil is.
And it’s not just Exxon. He’s excited about Chevron, too. “I think they’re both excellent,” said Smith. “If you want a little bit more yield, go with Chevron, which is yielding about 4%. Exxon’s yielding about 3%. Chevron has a little bit better profile in terms of production over the next 3 to 5 years,” he added.
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If the oil slide is making you nervous about buying stocks, the ongoing bull market in equities is probably weighing on you too. Smith has some picks for that, as well. He says General Electric (GE) – which he calls a “terrific company” – is a cheap buy in today’s market.
“The big thing is, GE has had huge, multiple contractions over the past 14 years. When Jack Welch left in 2000, the stock was selling at close to 50x earnings. Jeff Immelt had no shot. So this is a transition,” said Smith. He’s referring to a push Immelt has made to cut the company's revenue exposure to the financial segment, spinning off its GE Capital arm, now Synchrony Financial (SYF). “The company has transitioned before, and I think at these prices it’s a good entry point for long-term investors.”
Smith’s other pick? United Technologies (UTX). Why? “It hasn’t really moved that much,” he said. “They’ve had a bear market. They’ve had close to a 20% decline this fall… for worries because of the slowdown in the global economy.”
Smith thinks those worries are overblown – meaning United Technologies is a good buy right now. Plus, “You’re not chasing UTX – 2.5% dividend yield, consistent annual increases, very well run industrial company,” he said.
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