This article is a guest contribution by Vitaliy Katsenelson, CFA, portfolio manager/director of research at Investment Management Associates in Denver, Colo.
I wrote this article in January 2009, but this analysis of Exxon (and other religion stocks) still applies today.
A basic property of religion is that the believer takes a leap of faith: to believe without expecting proof. Often you find this characteristic of religion in other, more unexpected places–like the stock market.
It takes a while for a company to develop a “religious” following: Only a few high-quality, well-respected companies with long track records ever become worshipped by millions of investors. The stock has to make a lot of shareholders happy for a long period of time to form this psychological link.
The stories (which are often true) of relatives or friends buying a few hundred shares of the company and becoming millionaires have to percolate a while for a stock to become a religion. Little by little, the past success of the company turns into an absolute and eternal truth. Investor belief becomes set: The past success paints a clear picture of the future.
Gradually, investors turn from cautious shareholders into loud cheerleaders. Management is praised as visionary. The stock becomes a one-decision stock: buy. This euphoria is not created overnight. It takes a long time to build it, and a lot of healthy pessimists have to become converted into believers before a stock becomes a “religion.”
Religion stocks are held on faith. The traditional analysis is rarely applied, as it is perceived that these companies operate in a different gravitational field and that the laws that drive the valuations of the rest of the market are suspended when it comes to them. Take General Electric. Until recently, it was perceived as an infallible, can-do-nothing-wrong corporate icon. Its shares were passed from generation to generation with a whisper: “Never sell GE.”
However, once the religious, unconditional, in-GE-we-trust veil was lifted, many found it to be just another complex, un-analyzable financial conglomerate that is suffering from addiction to the commercial paper market. There is nothing new I can really say about GE except that it represents what is wrong with religion stocks–it is bought (and actually in most cases held) on faith. Few attempted to value it beyond looking at reported ruler-like earnings that were played like a fiddle by management by manipulating pension plan assumptions and shifts in reserves in opaque GE finance.
Today’s discussion is not about GE but about another religion stock that is about to get its religious veil stripped. I have to warn you, it is another infallible corporate icon that can do nothing wrong: Exxon (XOM 62.6 ‘0.14%) Mobil–the biggest (nongovernment-owned) oil company in the world, the $400 billion market cap gorilla that brought wealth to generations of people.
What is wrong with Exxon? On the surface, very little. It has $25 billion of net cash (cash less debt); it grew revenues and earnings on per share basis at 16.5% and 25%, respectively, over the last five years; it pays a decent dividend of 2.1%; and the stock is a true bellwether, as it is down only 15% year-to-date, when the market is down at least double that. Here is the best part: It trades at only nine times estimated 2008 earnings of $8.75 per share.
