This is my fourth article in a series that is focused on the most beaten down stock groups looking to buy the dip for the long ride back to prosperity. So previously I covered airlines, Chinese stocks and restaurants. Now is time to drill down into the oil sector.
Yes, the Coronavirus took the legs out from under the world economy. That is never good for oil prices. But making matters worse is the surprising flooding of the market games between OPEC and Russia that only acerbated the problem.
So in just 3 short months oil has fallen by nearly 70%. And with it oil stock prices have seen similar collapses. We all know this group will come back at some point. Just a matter of when. So now marks an interesting time to consider nibbling at industry leaders for the likely ample gains that await us 1-2 years down the line.
I believe it would be foolish to go for a smaller riskier energy play. Nothing wrong with taking a 3 iron in these windy conditions and laying the ball down in the middle of the green. That is exactly what you get when considering these 3 industry leaders: Exxon Mobil (XOM), Marathon Oil (MRO), and BP (BP). Let’s explore the merits of each below.
Exxon Mobil (XOM)
XOM has long been known for its consistency and strength as a major player in the market. Despite the current landscape, Exxon is one of the biggest corporations in the world and a mainstay of the Dow Jones Industrial Average. What’s more, XOM income seeking investors will drool over themselves with the dividend yield now above 9%.
Yes, they will likely cut that dividend down in this environment. But still probably ends up north of 5%. And then you have the idea that the 52 week high is $83.49. If shares just make it back there in 2-3 years that would mark a 100% gain….which makes buying at this level very tempting.
Marathon Oil (MRO)
MRO is another obvious choice at the top of the energy food chain. The company revised its capital budget for 2020, shaving 30%, or $500 million from 2019’s spending level. This is a strategic move to shelter their balance sheet, preserve cash flow generation, and fund MRO stock dividends.
In this case we have a MUCH steeper drop from the 52 week high of $18.93 to around $4 right now. So that means MRO would provide a nearly 5X return getting back to the previous highs. And thus shouldn’t be too tough gutting out a 100% gain discussed above for XOM. MRO looks like a case of a touch more risk, for a lot more potential reward.
BP is another oil and gas powerhouse that has fallen on hard times with the group. However, as we look back over time it actually has shown better earnings results than most of its peers. This operational strength gives investors a touch more confidence that BP will regaining its footing likely ahead of its competitors. That explains why BP shares are not down as much as the others…but still down plenty from $45.38 high.
In this case there is a bit more attachment to the European economy which looks to be taking it even harder than the US economy at this time. So that does add a bit more of a question mark to this investment equation. However, right now they also offer the biggest dividend yield (north of 10%).
Adding it altogether this may not be the cheapest of the group, but history of superior operational success and bigger dividend makes BP one of the better energy investments to tap at this time (pun intended 😉
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XOM shares were unchanged in after-hours trading Thursday. Year-to-date, XOM has declined -43.57%, versus a -18.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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