Image: Exxon Mobil has been one of the biggest contributors of alpha to the Best Ideas Newsletter portfolio during 2022. Image: Valuentum
By Brian Nelson, CFA
Without a doubt, adding Exxon Mobil (XOM) to the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, and High Yield Dividend Newsletter portfolio in June 2021 was one of the biggest value-generating moves by our organization to generate “alpha” in 2022. Where other ideas such as Meta Platforms (META) and PayPal (PYPL) failed this year, Exxon Mobil and Chevron (CVX) helped to pick up the slack in 2022, and we’re pleased.
Our alert from June 27, 2021: In the Dividend Growth Newsletter portfolio, we’re adding a 5-7% weight in ExxonMobil and a 3-4% weighting in Chevron. In the Best Ideas Newsletter portfolio, we’re adding a 4-6% weighting in ExxonMobil and a 3-5% weighting in Chevron. We like their respective dividend yields, and the strengthening energy markets have only made their future free cash flow prospects better.
We had been bullish on the markets in June of 2021 (some 18 months ago now), which preceded a huge rally through the end of last year, and we didn’t turn defensive and cautious on the equity markets until mid-August of this year, as it became clear that equity markets would start to reflect the pain that inflation and a negative wealth effect across asset classes would inflict on already-strained consumer discretionary budgets. The move to “raise cash” in the Best Ideas Newsletter portfolio in mid-August through mid-October has been a key source of relative outperformance through the last measurement December 4.
The economic news isn’t get better, in our view. Inventories are bloated at industry bellwethers such as Target (TGT) and Nike (NKE), while Lululemon Athletica (LULU) just reported inventory growth of 85% on a year-over-year basis for the period ending October 30, 2022. Consumer discretionary spending seems to be deteriorating at a rapid clip as consumers work through their excess COVID-19 savings, use hardship distributions from their 401(k)s, and rely on their credit cards to pay for the rising cost of groceries and other living expenses. The shift in consumer behavior from last year has been monumental.
Exxon Mobil’s Shares Have Soared in 2022, Shares Still Cheap
Exxon Mobil’s shares have advanced more than 60% so far year-to-date, on a price-only basis, and offer investors a forward estimated dividend yield of ~3.5% at the time of this writing. Back in mid-2021, the stock was a no-brainer. Momentum behind some of the strongest big cap tech names was slowing, and overweighting energy at the time turned out to be a very smart move for the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, and High Yield Dividend Newsletter portfolio during 2022.
We liked the latest news from Exxon Mobil, too.
On December 8, 2022, Exxon Mobil released its corporate plan through 2027. Earnings and cash flow from operations are expected to double by 2027 compared to levels reached in 2019, annual capital outlays will remain in the range of $20-$25 billion through 2027, while it expects to spend up to $50 billion buying back stock through 2024 (including $15 billion in 2022). The energy giant is also paying close attention to cost items and expects to delver ~$9 billion in structural cost reductions by year-end 2023, again relative to 2019. Exxon has increased its dividend for 40 consecutive years.
Concluding Thoughts
It would have been difficult to sit out energy during 2022 and have a good year. Though the areas of dividend growth and high-yield dividend investing have held up better than more speculative areas, energy has been a key source of alpha across our newsletter suite this year. We added Exxon Mobil mid last year, in June 2021, to the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, and High Yield Dividend Newsletter portfolio, and shares have rocketed more than 60% higher during 2022 alone. We continue to like shares of Exxon Mobil and peg a per-share fair value estimate of $122 on them.
Now read: 2022 Oil & Gas Market Update: “The Outlook for Crude Oil Prices Remains Quite Bullish”
Tickerized for holdings in the XLE.
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But how, you will ask, does one decide what [stocks are] “attractive”? Most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth,”…We view that as fuzzy thinking…Growth is always a component of value [and] the very term “value investing” is redundant.
— Warren Buffett, Berkshire Hathaway annual report, 1992
At Valuentum, we take Buffett’s thoughts one step further. We think the best opportunities arise from an understanding of a variety of investing disciplines in order to identify the most attractive stocks at any given time. Valuentum therefore analyzes each stock across a wide spectrum of philosophies, from deep value through momentum investing. And a combination of the two approaches found on each side of the spectrum (value/momentum) in a name couldn’t be more representative of what our analysts do here; hence, we’re called Valuentum.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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