To come up with another one of Real Money's best stock picks for 2020 series, I had to rack my brain for an attractive pick in an overall market that is trading at 20-times 2020 earnings per share, a level that has not been sustained by the S&P 500 for 17 years.
There is not much value in the U.S. equity market right now, and value-trap sectors such as autos could lead to more heartache next year. I have followed the car sector for the last 27 years, and believe me when I tell you that Ford (F) and General Motors (GM) always look cheap.
So, I had to return to one of my old favorites, and a stock I have owned for many years, Exxon Mobil (XOM) . That's where the recidivism comes into play. I have noted in many Real Money columns my appreciation for, and long-term holding, of XOM, but the stock has been, frankly, a dog. This is a FANG -- Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Alphabet's Google (GOOGL) -- market, and Exxon has barely been through the teething stage.
So, to plow fresh capital into XOM here, you have to believe in a specific scenario from both a macro and micro standpoint.
On the macro side, it is not widely promulgated, but a key driver of the "Trump Jump" in the U.S stock markets and economy -- especially in employment figures -- has been low hydrocarbon prices. The energy sector's pain has been the rest of the market's gain. Every time you see an Amazon truck tooling down the highway -- and I have seen many during my travels this holiday season -- you should realize that cheap gasoline is helping fuel Amazon's profits. That package is going to hit your doorstep no matter what, but as Amazon increasingly vertically integrates into shipping at the expense of FedEx (FDX) and UPS (UPS) , fuel costs become an increasing part of the cost structure at CEO Jeff Bezos' behemoth.
That's just one example, but the list of "winners" from cheap hydrocarbon pricing is quite long. The list of losers is confined to one particular sector, as seen in the massive underperformance of the Energy Select Sector SPDR (XLE) over the past five years. XLE has "only" gained 11.5% in 2019, but even that lagging gain tells me that sentiment has finally bottomed for energy stocks.
So, I am expecting better hydrocarbon pricing, and better energy stock performance, in 2020 for one simple reason: declining rig counts. The U.S. oil rig count finished last week at 677 down 208 from the same period in 2018 and the natural gas rig count stood at 125 vs. 198 a year ago.
Perhaps energy executives have finally realized that we are producing too much oil -- and way too much natural gas -- in this country to achieve economically feasible returns.
Who benefits from that? Well, that's where the micro trumps the macro. I believe oil prices will follow a glide-path toward $70 per barrel in 2020, and that is pure profit for the exploration and production companies. Instead of playing the debt payoff mechanics of the independents, though, I choose to play the energy sector with Exxon Mobil in 2020.
Meanwhile, in light of the U.S. killing of an Iranian senior military commander and Friday's EIA report showing a nearly 12 million barrel decline in U S. oil inventories, the underpinnings for crude oil prices are stronger than they have been at any time in the past five years.
I believe XOM's dividend, already equating to an extremely attractive 5% yield at the current quarterly payout rate of $0.87 per share, will be increased by 4% to 5% at the Board's May meeting (the normal schedule for Exxon's annual dividend increase.). Also, I have high, high, hopes that XOM management will use the increased cash flows -- net of hedging -- from higher hydrocarbon prices to do the one thing they have hesitated to do in the last five years: buy back stock.
Apple (AAPL) CEO Tim Cook seems to be spending a lot of time in Texas these days, so perhaps he could stop by Irving, Texas, and have a chat with Exxon's CEO Darren Woods about the benefit of share repurchases.
I think this is the year XOM management finally gets religion. Chevron's (CVX) massive write-down of its Appalachian natural gas assets opens the door for XOM to take a similar write-down on its legacy natural gas assets from the 2010 purchase of XTO. That would be a non-cash charge, and it would be just what XOM needs to turn the page and start using its cash to bolster its stock price.
So, on the bottom line, XOM is trading at around 18.5-times the analyst consensus 2020 EPS estimate of $3.78 and currently yields 5%. That's cheap. It would take a paradigmatic shift back into value stocks for XOM to really outperform, but with tech stocks' valuations approaching year 2000 levels and the craziness of a presidential election season upon us, that is exactly what I believe will happen.
