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Here's a pretty compelling article by Matt Krantz printed in USA Today about Exxon Mobil as an investment:
ExxonMobil stock could put a tiger in your portfolio's tank
Updated 8/8/2006 12:30 PM ET
Q: With the price of oil soaring, is ExxonMobil (XOM) a must-have stock for investors?
A: If you've filled up your gas tank lately, you've had a reminder of why oil giant ExxonMobil is raking it in.
The company reported a $10.4 billion profit in the second quarter, the second-most money earned by a company in a quarter. It only fell short of its own $10.7 billion profit in the fourth quarter last year.
Some investors figure it's time to stop bellyaching about high gasoline prices and find a way to profit instead. Keep in mind that if you own an index that owns the Standard & Poor's 500 index, you already own the stock. But if you are thinking about buying just shares of ExxonMobil, there are four things you should consider:
Step 1: Risk vs. reward. Before you buy any stock, you should evaluate its risk and return and see if it's worthwhile. We can do this by downloading ExxonMobil's trading history back to 1970.
ExxonMobil is one of the few companies that actually pass this test. Few stocks generate an average annual return high enough to justify their risk relative to a broad index, such as the Standard & Poor's 500. But ExxonMobil does.
The company has generated average annual returns of 12.9%, assuming the company's current dividend yield was constant at 1.9%. That's better than the 11% average annual return of the S&P 500 during the same time.
Even more interesting, investors didn't have to take extraordinary risk to achieve that return. The stock has a standard deviation of 16.2 percentage points. That's higher than the S&P's risk since 1970 of 15.5, says IFA.com, but justifiable. ExxonMobil investors only took 1.3 units of risk to generate 1% in return. That's a slightly better than the S&P, where investors took on 1.4 units of risk for every 1% in return.
And get this. There's a modest benefit holding this stock as a means to diversify. Statistically, ExxonMobil moves somewhat differently than the broad market.
Step 2: Discounted cash flow analysis. Many sophisticated investors determine if a stock is fairly priced by looking at the present value of its expected cash flows. This calculation can be fairly complicated, but it's made simple with a system from NewConstructs.com, which reports ExxonMobil is "very attractive" based on the discounted cash flow model.
Step 3: Price-to-earnings (P-E) valuations. Some investors like to measure a stock's price by comparing its P-E based on expected future earnings to its historical range.
One way to do this easily is with BetterInvesting's Stock Selection Guide. If the company grows earnings 7% a year the next five years, as analysts expect, the Stock Selection Guide rates the stock a "buy" until it hits $85.30 a share.
Step 4: The company's financial standing. It seems silly to even consider this with Exxon, since the company is sitting on $37 billion in cash. But just to amuse ourselves, we can look at USATODAY.com's Stock Meter to see how it stacks up. And as we'd expect, the company scores an incredibly solid 1.8, which means it is a conservative investment.
It's hard to find fault with this stock. It passes the all four tests, including the statistical comparison of risk vs. reward that few stocks pass. It also has a bit of diversification benefit since it doesn't trade in lockstep with the market. There could well be a place for ExxonMobil in your portfolio.
Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at [email protected].
ExxonMobil stock could put a tiger in your portfolio's tank
Updated 8/8/2006 12:30 PM ET
Q: With the price of oil soaring, is ExxonMobil (XOM) a must-have stock for investors?
A: If you've filled up your gas tank lately, you've had a reminder of why oil giant ExxonMobil is raking it in.
The company reported a $10.4 billion profit in the second quarter, the second-most money earned by a company in a quarter. It only fell short of its own $10.7 billion profit in the fourth quarter last year.
Some investors figure it's time to stop bellyaching about high gasoline prices and find a way to profit instead. Keep in mind that if you own an index that owns the Standard & Poor's 500 index, you already own the stock. But if you are thinking about buying just shares of ExxonMobil, there are four things you should consider:
Step 1: Risk vs. reward. Before you buy any stock, you should evaluate its risk and return and see if it's worthwhile. We can do this by downloading ExxonMobil's trading history back to 1970.
ExxonMobil is one of the few companies that actually pass this test. Few stocks generate an average annual return high enough to justify their risk relative to a broad index, such as the Standard & Poor's 500. But ExxonMobil does.
The company has generated average annual returns of 12.9%, assuming the company's current dividend yield was constant at 1.9%. That's better than the 11% average annual return of the S&P 500 during the same time.
Even more interesting, investors didn't have to take extraordinary risk to achieve that return. The stock has a standard deviation of 16.2 percentage points. That's higher than the S&P's risk since 1970 of 15.5, says IFA.com, but justifiable. ExxonMobil investors only took 1.3 units of risk to generate 1% in return. That's a slightly better than the S&P, where investors took on 1.4 units of risk for every 1% in return.
And get this. There's a modest benefit holding this stock as a means to diversify. Statistically, ExxonMobil moves somewhat differently than the broad market.
Step 2: Discounted cash flow analysis. Many sophisticated investors determine if a stock is fairly priced by looking at the present value of its expected cash flows. This calculation can be fairly complicated, but it's made simple with a system from NewConstructs.com, which reports ExxonMobil is "very attractive" based on the discounted cash flow model.
Step 3: Price-to-earnings (P-E) valuations. Some investors like to measure a stock's price by comparing its P-E based on expected future earnings to its historical range.
One way to do this easily is with BetterInvesting's Stock Selection Guide. If the company grows earnings 7% a year the next five years, as analysts expect, the Stock Selection Guide rates the stock a "buy" until it hits $85.30 a share.
Step 4: The company's financial standing. It seems silly to even consider this with Exxon, since the company is sitting on $37 billion in cash. But just to amuse ourselves, we can look at USATODAY.com's Stock Meter to see how it stacks up. And as we'd expect, the company scores an incredibly solid 1.8, which means it is a conservative investment.
It's hard to find fault with this stock. It passes the all four tests, including the statistical comparison of risk vs. reward that few stocks pass. It also has a bit of diversification benefit since it doesn't trade in lockstep with the market. There could well be a place for ExxonMobil in your portfolio.
Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at [email protected].
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