As oil prices have climbed to record levels, shares of energy producers and energy-service companies have surged. But stocks in those subgroups are notoriously volatile. For buy-and-hold, conservative investors, the best choice is integrated oil-and-gas king ExxonMobil, says Morningstar analyst Justin Perucki. Plus, he says, now's a good time to pick up the stock on the cheap.
Exxon is widely admired for its financial strength and operational efficiency. Its "massive scale and unrelenting pursuit of operational efficiency create a competitive advantage that the firm can bank on, no matter what path energy prices take," says Perucki. Other analysts, including Jacques Rousseau of Friedman Billings Ramsey, also like the stock in part because it isn't as sensitive to the price of oil as some of its peers, which should mean that the shares hold up better when oil prices decline.
But not everyone sings Exxon's praises. As the world's largest oil company, it takes a lot of flak for benefiting from high prices at the pump. Profits of $36 billion last year were the largest ever reported in a single year by a publicly traded company. Despite that number, Perucki notes, Exxon's stock was one of the worst performers in the energy sector in 2005. That's partly because of Exxon's enormousness and partly because the company is "always in the headlines" when the subject of gasoline prices comes up. "It's also not looked upon as the most environmentally friendly company," he adds.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Soaring gas prices are a hot political issue, as consumers worry how they'll deal with high gasoline prices throughout the summer and beyond. Congressional leaders are calling for investigations, and President Bush on Tuesday called on Congress to roll back tax incentives for energy companies, among other things. Although Perucki acknowledges that rolling back tax incentives or increasing taxes (such as through a windfall tax) is a risk that all oil companies face, he says that smaller firms, who are not as established and not as profitable as the giants, would be hurt the most. At any rate, he emphasizes that the political banter doesn't affect Exxon's underlying fundamentals. He does say that the recent political noise is part of the reason the stock (symbol XOM) is trading below its fair value, a figure he pegs at $75 per share. The stock closed Tuesday at just below $64.
Exxon focuses on profitability, and Perucki points out that its returns on assets are the envy of the industry. The company rewards investors through a large share repurchase program and has raised its dividend more than 20 years in a row. The stock yields 2.0%.
--Lisa Dixon
-
How to Navigate Your Medicare Advantage Plan in a DisasterIf you're a Medicare Advantage member in an area that has been impacted by a disaster, you might be worried about access to care and medicine. Here's what you need to know.
-
Older Investors: Boost Your Savings and Retire EarlierThis one measure can help older investors retire up to two years earlier and potentially double their retirement savings.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
Dow Dives 542 Points on Soft Jobs Data: Stock Market TodayThe last day of a busy week ends with the first greater-than-1% move in either direction in more than a month.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
My Three-Day Rule for Investing: And If it Applies NowStock Market I've seen a lot in my career. Here's what I see now in the stock market.
