Are the Saps Getting Back Into the Stock Market?

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The stock market is on a tear so far this year, as companies produce a string of better-than-expected earnings for the fourth-quarter of 2012 and economic indicators look cheerier, at least for the time being. Evidence? Well, just look at the flow of new assets into equity mutual funds. As calculated by Lipper, U.S. stock equity mutual funds attracted a whopping $11.3 billion in the first two full weeks of January, the kind of two-week inflow that we haven’t witnessed since April 2000, just after the dotcom bubble burst.

Of course, some of that money belongs to poor saps who exited the market after it plunged, and they’re getting back in now at a high relative cost. From early 2009’s trough to today’s peak, for instance, Chevron (CVX), an attractive integrated oil company, has more than doubled. Individual investors frequently sell after stocks have tanked and then wait to buy until stocks have made a big move upward, the opposite of Warren Buffett’s maxim to be greedy (buy) when others are fearful and be fearful (sell) when others are greedy. And the recent influx of money to stock funds, after a steady flight from such funds, suggests some very un-Buffett-like behavior.

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CVX Chart

Here at YCharts, we thought it would be a good time to look at some of the most widely-owned stocks among all U.S. publicly traded companies – the companies in which a majority of Americans who have positions in mutual funds are likely to own by proxy, if not directly – and evaluate the extent to which they have contributed to the nascent 2013 rally, or detracted from it. As investors have learned over the years, simply because a stock is widely owned doesn’t make it more likely to be an outperformer. Indeed, the stocks that put in the most surprising upward moves often tend to be those whose fortunes have lagged until very recently, or less liquid stocks where an improvement in fundamentals can have an outsize impact on share price.

We’ll kick off by taking a look at Chevron, whose shares have rallied 5.14% so far this year, posting a return that is more than double that of the S&P 500.

The main catalyst for this move has been Chevron’s announcement that it expects that its fourth-quarter earnings will be significantly higher than the $2.69 a share it announced in the third quarter in spite of a decline in refining margins. Chevron noted that it expects to report an uptick in production levels that, combined with asset sales, will help propel the company’s profits higher. Moreover, natural gas prices were about 20% above third quarter levels, while crude oil prices were largely flat, helping the company do better in terms of revenues and the bottom line.

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CVX PE Ratio TTM Chart

The valuation data certainly make a compelling case for owning Chevron: while the company’s PE ratio is an anemic 9.5, the company boasts a dividend yield of 3.10%, well above the market median and trending higher. The PE ratio makes Chevron about as costly as Exxon (XOM) and a tad pricier than ConocoPhillips (COP) and Royal Dutch Shell (RDS-B) The reason for investors’ apparent wariness? Chevron and the others are oil and gas producers, with all the cyclical worries that implies. The company clearly is vulnerable to any downturn in commodity prices that follows any future decline in global economic activity, and it has exposure to regulatory and environmental risks. And then there is the problem of the pesky decline in refining margins: Chevron’s West Coast refining margins fell 20% in the fourth quarter over year earlier levels, thanks to the usual seasonal slump in driving that weighs on the demand and price of gasoline.

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CVX Gross Profit Margin Quarterly Chart

One interesting trend to watch: Chevron is making a push into liquefied natural gas production with the purchase of a 50% interest in the Kitimat project in British Columbia, Canada. In the years to come, as all the new gas projects made economic by the use of fracking technology come on stream, they will need to find markets; producers will find it counterproductive if they are forced to shut in large quantities of the fuel because prices are so low as to make it impossible to produce them profitably. LNG is part of the solution; to the extent that capacity is added here, Chevron can ship gas output to China, Japan and to other nations that lack extensive domestic carbon reserves.

Chevron will release its fourth-quarter results on Friday; analysts are predicting that the company will announce earnings of $3.04 a share, a nearly 18% gain in profitability. Whether it’s a stock to own for the long run or not, a sold earnings ‘beat’ here could ensure that the rally in Chevron’s share price can be sustained, at least in the short term.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.


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