Tuesday, December 12, 2023

Rockefeller’s Favorite Business Is a Screaming Buy

Rockefeller's Favorite Business Is a Screaming Buy

By Lucas Downey, Contributing Editor, TradeSmith Daily

After the meltdown in September and October, stocks have staged a crowd-stunning rally.

In fact, the S&P 500 now sits at the highest closing level since March 2022.

That's how it tends to go. Extreme pullbacks regularly preface extreme recoveries.

But given the massive runup, some investors may be reluctant to buy new positions…

I don't blame them. After all, rarely are you going to get the deck stacked as favorably as it was back in October.

However, when you dive below the surface of the market, one sector is actually more oversold today than during October's swoon. And if you're hunting for value in a red-hot market, this is where you want to focus.

Today, we'll dive into the data looking at two valuation metrics that make names from this deeply oversold sector a top choice in the weeks and months ahead.

Then I'll single out one stock you should consider for 2024.

Not All Stocks Are Expensive

They say value is in the eye of the beholder.

It's also uncovered by those who do their research.

While it's true that the S&P 500 is not cheap by a price-to-earnings (P/E) measure, when you look below the surface you see how certain unloved areas meet the "cheap" criteria.

When it comes to the P/E ratio, readings of 20 or higher are generally expensive, while valuations approaching 10 are considered inexpensive.

Here I've broken down all S&P sectors by their next-12-months forward P/E (NTM). The S&P 500 sports an elevated 18.9 reading. But take note of the sector in the bargain basement, at a lowly 10.35 NTM P/E:

The NTM P/E can also be thought of as a sentiment barometer. A 10 reading suggests little excitement from the trader community on Energy stocks. Contrast that to the 26.2 valuation of the Info Tech space.

Folks are placing their bets on growth. It's easy to see why — there's lots of celebration over the A.I. revolution.

However, you can't dismiss the oversold energy stocks. Because what you're getting paid to own the unloved energy space — especially Oil & Gas stocks — is off the charts.

If you've been following along in TradeSmith Daily, you know I love stocks that pay dividends, which are a share of profits that companies pay back to shareholders.

The S&P 500 has a meager dividend yield of 1.47%… not too sexy.

But after the latest Energy stock dump, payouts offered by the Energy sector are uber attractive, with a 3.85% average yield. For those keeping score, that yield is 162% higher than the market's!

Sooner or later, the public will wise up to this hidden-in-plain-sight value.

My view is that next year's money shift will be the trigger that sends cash flowing out of less-attractive money market funds and into dividend-rich stocks.

And one elite dividend grower is worthy of consideration today.

One All-star Dividend Aristocrat: Chevron

When it comes to dividend stocks, you should focus on continuous dividend growth. That means isolate businesses that constantly produce bigger and bigger profits… then return a larger share of those profits to shareholders.

One surefire place to get dependable cash-flowing dividend payouts is in the Oil & Gas space.

But you must be choosy. Only top-shelf companies are worth a long-term investment.

Take Chevron Corp. (CVX). CVX has the resume that dividend investors dream about.

With 36 years of continuous dividend hikes, consider the following facts about CVX:

5-year free cash flow compound annual growth rate (CAGR) is 40.4%. This amounts to nearly $21.6 billion in free cash flow expected for 2023.
5-year net income CAGR is 31%. This translates to $25.8 billion in expected income for 2023.
5-year dividend growth is 34.8%. At the current dividend of $1.51, Chevron's dividend yield is a juicy 4.2%.
CVX sports a super cheap forward P/E of 10… even cheaper than the 10.35 forward P/E of the sector.

If these points don't get your bullish juices flowing, maybe the following chart will.

Chevron has been punished so much lately that the shares are trading at an 8.5% discount to its 200-day moving average.

At $145 a share, today's levels match September 2022's prices:

Source: YahooFinance
It's simple. Valuations are at rock-bottom for Energy stocks.

Not only that, Energy stocks overall are paying shareholders nearly 4% on average.

Given Chevron's decades of paying and raising dividends, and its higher-than-average yield, this appears to be a smart bet.

And with the stock price nearly 9% below its 200-day moving average, this is a bargain-basement deal, folks.

John D. Rockefeller said it best, "The best business in the world is a well-run oil company. The second best business in the world is a badly run oil company."

What I'm suggesting with CVX today is a well-run oil company.

If you're looking for strong yields in a cheaply valued sector, you can't do better than energy stocks right now. And it may well be a favorite target of dividend-seekers as risk-free yields retract in 2024.

We'll keep searching for great dividend plays for you right here in TradeSmith Daily, so make sure you don't miss a single issue.

Regards,
Lucas Downey,
Contributing Editor, TradeSmith Daily

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Tuesday, December 12, 2023