Everybody’s heard about this week’s Stock of the Week.

It’s a very big company… and it’s in a sector that’s all over the news.

But guess what? That doesn’t matter.

In down markets, all investors want to beat the drop… outrun it… and get a positive return.

That’s when the big names get very attractive.

When the markets drop, it’s all about the sectors that are expected to do well… and the companies that have solid balance sheets, solid profit and loss statements, and solid cash flow statements.

And this week’s pick has all that – and more.

It has a ton of cash… has no problems handing out dividends… and is cheap to boot.

Get all the details on the stock – including its ticker – in this week’s episode of Stock of the Week.

Click on the image below to watch it.

Transcript

I have a slightly different and particularly interesting Stock of the Week for you this week.

It’s one you’ve surely heard of. It’s a very big company… and it’s in a sector which is very much in the news. That might make you say, “Hang on, you’re just giving us stuff that we should already be well aware of!”

Well, actually, there’s a lot of things you won’t be aware of with this company.

For instance – before I reveal the name – sometimes hedge funds will go for the big, well-known names.

After all, when there’s an anticipated market slowdown or greater fall, hedge funds obviously want to beat them. We want to outrun them. We want to get a positive return.

So sometimes it’s about sectors which are anticipated to do well and companies which have got solid balance sheets, solid profit and loss statements, and solid cash flow statements.

Our Stock of the Week has all of those things.

I’m talking about Exxon Mobil (XOM).

Of course, you’ve heard of it. Everybody’s heard of it. But that’s not the point.

Just look at these numbers…

Exxon reported income of $17.9 billion in just the three-month period ending in June. It costs about the same to get the product out of the ground… but you can sell it for a lot more nowadays.

Cash flow increased by $7.8 billion in the second quarter. $7.8 billion. If there is a market downturn, it’s going to be companies like this, in sectors like this, which are going to become safe havens.

Free cash flow in the second quarter totaled $16.9 billion. Again, that’s free cash flow, unencumbered cash flow.

The company also has a ton of money for dividends. There’s no worries there whatsoever.

On my Growth-Value-Income rating, Exxon scores a 7. Remember, this is my proprietary indicator that looks at the valuation of companies, all the academic research that goes into these things, and then we weigh it all.

We look at the valuations based on the profitability and the share price of the company, revenue growth, cash flow generation, dividend yields… all of these factors. And we score it out of 10. Anything with a 7, 8 or 9 meets my minimum requirements and is green lighted.

CROCI – or cash return on capital invested – is 17.4%. If you’ve been following along, you know that this formula was invented by Deutsche Bank and is used by Goldman Sachs Wealth Management.

I came across it at a lunch with the chairman of Goldman Sachs Asset Management at the time, Lord Jim O’Neill. I saw data from the Quantum Division which revealed that companies in the top quartile, the top 25% by cash return on capital invested, as a basket tended to generate about 30% per annum returns.

Exxon has a solid CROCI.

Now, when we look at a price chart, we can see that for the last couple of years the stock’s been performing well. There’s been a turnaround… but it won’t last forever.

This is not a “buy now, forget forever” kind of stock. My general rule would be to hold it for at least 12 months and then reevaluate.

The Sortino ratio is 0.34. That’s a measure of reward versus risk. In other words, the average return versus the average volatility of missing it. It’s positive, so that’s good, though yes, I’d like it to be higher.

Volatility is a little bit high but below my 20% threshold. I don’t want to see a stock’s volatility above 20% in a falling market. It gets just a bit too risky. But 19% is a good number.

Let’s look at a few more of the company’s numbers…

It’s reduced borrowing. Well, of course it has… It’s got all this cash coming in.

Turnover has spiked up, and operating cash flow is up. In this global market, these are the kinds of things you’d expect.

Return on capital employed is a good number at 11%. Return on equity is a sound number at 14%. Of course, Exxon’s getting these big numbers. It’s getting them because so much money’s coming in. The company has a license to print money because so much is coming in the door.

What about valuation? When we look at forecasted future earnings, the current share price is trading at only a multiple of 7.5. That’s cheap. Forecast future earnings are high.

Exxon’s share price is quite low right now. I expect it to continue rising… and the low share price is really what caught my eye. Not to mention the increase in both turnover and profitability.

You might say, “Isn’t that all factored into the share price?”

It’s always difficult to know what’s factored into the share price. But when we look at a stock chart from May 2019 to today, we can see that the turnaround came around in September 2020 – about two years ago.

It’s been moving in an upward channel and band… and I expect that will continue.

There might well be weeks when the stock drops and then bounces up. Historically, that’s what it’s done.

With this week’s Stock of the Week, I wanted to show you that sometimes, yeah, I pick companies you’ve heard of.

Thank you very much.