Is Chevron a Buy at All-Time Highs?

With shares of Chevron (NYSE:CVX) trading around $128, is CVX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Chevron engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company operates in two segments: upstream and downstream. The upstream segment is involved in the exploration, development, and production of crude oil and natural gas, while the downstream segment engages in refining crude oil into petroleum products. Through its segments, Chevron is able to provide a range of energy products and services to a wide variety of companies around the world. As economies and businesses expand, Chevron is poised to provide the energy products and services required to fuel growth around the world.

On Monday, shares of Chevron traded to a new all-time high of $128.80 per share. Despite this, the stock has been underperforming the broader market by about 2 percent this year. Investors have expressed bullishness toward the stock, but at the same time they are interested in higher beta growth stocks, particularly the smaller companies that are operating in the Eagle Ford and Bakken shale regions in Texas and in Montana and North Dakota. However, with oil prices rising and uncertainty hitting the markets in the form of social unrest in Iraq, it might be time to consider a lower-risk play such as Chevron, despite the fact that it is trading at an all-time high. But it is not trading as if it were at or near a major top. The stock trades with a modest valuation of 12.5 times trailing earnings and at 11.7 times 2014 earnings estimates. Analysts have an average price target of $132 per share on the stock, which is higher than the current price, but which is low considering the low price-to-earnings multiple and the general bullish outlook on the rest of the market.

Chevron has historically been a solid investment. First, it generates a lot of free cash flow. While this figure came down in 2012 and again in 2013, this is after a significant rise in 2009 and 2010. With the stock trading at such a low valuation, it seems that investors are expecting this negative trend to continue. Second, it invests its capital wisely throughout the globe. Chevron has a clear long-term growth plan that focuses on high-growth regions such as the North American shale regions and Asia, which is the fastest-growing region in the world. The company will also be investing in Africa and South America while scaling back in Europe. This illustrates that the company is committed to a globally diversified portfolio while remaining cognizant of the fact that the opportunities are better in some parts of the world than others. This won’t show up in earnings in the next six months, but in five to 10 years, this thinking will pay off.

Third, it returns capital to shareholders through a healthy balance of dividends and stock repurchases. This is ultimately the reason to own stocks: They allow your money to work for you by generating returns. While investors are often enamored of high-flying Internet stocks and the stocks of social media companies, they often neglect companies like Chevron that earn an incredible amount of money and use this money to reward their long-term shareholders. Chevron earned $21 billion last year and returned $12 billion of it to shareholders, leaving it with $9 billion to invest. Yet the company is worth $244 billion even with shares at an all-time high. Chevron is a great stock to own for the long term, and it offers great value today despite the fact that it is trading at an all-time high.

T = Technicals on the Stock Chart are Strong

Chevron stock has been moving higher over the last couple of quarters. The stock is currently trading near all time highs and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Chevron is trading above its rising key averages which signal neutral to bullish price action in the near-term.

CVX

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Chevron options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Chevron options

16.83%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Chevron’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Chevron look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-25.79%

-30.54%

-4.46%

-27.30%

Revenue Growth (Y-O-Y)

-6.25%

-4.10%

0.79%

-8.30%

Earnings Reaction

-0.17%

-4.13%

-1.62%

-1.17%

Chevron has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Chevron’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Chevron stock done relative to its peers, BP (NYSE:BP), Royal Dutch Shell (NYSE:RDSA), Exxon Mobil (NYSE:XOM), and sector?

Chevron

BP

Royal Dutch Shell

Exxon Mobil

Sector

Year-to-Date Return

2.49%

5.95%

12.67%

0.49%

6.40%

Chevron has been an average performer, year-to-date.

Conclusion

Chevron is an oil and gas bellwether that provides essential energy products and services to consumers and companies worldwide. On Monday, shares of Chevron traded to a new all-time high of $128.80 per share. The stock has been moving higher over the last couple of quarters and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been decreasing. However, investors have been pleased with recent earnings announcements. Relative to its peers and sector, Chevron has been an average year-to-date performer. WAIT AND SEE what Chevron does this coming quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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