Exxon Mobil (NYSE:XOM) has been underperforming the overall stock market this year, with shares up less than 1 percent. Meanwhile the S&P 500 is up nearly 5 percent. Investors are getting a great opportunity to rotate out of some outperformers at this point to put money to work in an undervalued, safe, diversified, and recession-resistant stock—namely Exxon Mobil.
Exxon Mobil is the world’s largest integrated oil and gas company with a market capitalization of about $440 billion. The stock has largely underperformed its peers over the past couple of years as investors are concerned that it isn’t growing production quickly and that profits are flat. But I think the company is prepared to generate very strong returns in the long run. I also think that the current market environment is idea for a stock such as Exxon Mobil. Here’s why.
First, interest rates are low, and this benefits companies such as Exxon Mobil that have excellent credit ratings. Exxon Mobil is well positioned to borrow money inexpensively if it finds investment opportunities. Since this market has the potential to become volatile, this should benefit shareholder as the company can potentially pick up assets inexpensively, particularly in regions that are geopolitical hotspots now but which won’t be forever (e.g. Russia, Iraq). For example Exxon Mobil recently borrowed money to fund an investment in Vietnam, and it had no trouble raising this capital.
Second, with geopolitical tensions in the Middle East and in Eastern Europe the prices of oil and natural gas are rising. As an oil and gas producer Exxon Mobil is positioned to benefit. Oil stocks may perform extremely well in this situation as rising energy costs hurt virtually every segment of the economy except for energy stocks. This means that we can see a lot of money flow into these stocks as it exits others.
Third, with stocks trading at all-time highs it is very difficult to find reasonably priced investment opportunities, as many stocks are pricing in extremely positive scenarios. Exxon Mobil is modestly priced at less than 14 times earnings, or about two-thirds of the P/E multiple of the broader stock market. Exxon Mobil also has a very aggressive stock repurchase program that is reducing the number of shares outstanding, and it will continue to use its cash-flow in order to buy back shares so long as it can’t find excellent investment opportunities. Meanwhile, as I’ve mentioned should one of these opportunities come around the company can buy make the investment by issuing debt and slow down its buyback to quickly pay back the debt.
Fourth, with the market vulnerable to the downside investors are going to look to large diversified companies with free cash-flow. Exxon Mobil’s diversification is geographic, and that is crucial in this day and age. With geopolitical tensions and regulations threatening individual regions, it is good to be a global company. For instance, Exxon Mobil has some Bakken Shale land which is under regulatory threat as some scientists believe that hydraulic fracking causes earthquakes and generates pollution. But this is just one of the company’s holdings, and even if hydraulic fracking were to be completely eliminated in the United States it would barely hit Exxon Mobil because it is so large and diversified.
With these points in mind Exxon Mobil comes across as a low-risk investment opportunity. It isn’t going to skyrocket higher, but it is going to generate stable returns that get gradually larger over the years.
Disclosure: Ben Kramer-Miller is long Exxon Mobil.