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Bull of the Day: Chevron (CVX)

Ryan McQueeney
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Bull of the Day: Chevron (CVX)

Stocks were hammered on Wednesday as Wall Street opted to reduce risk and cash out of profitable trades amid rising bond yields. Oil sunk to a similar degree. But these moves are likely healthy corrections, and if/when selling plateaus, the oil stocks which showed strength prior to this volatility should continue to attract investors. Our Zacks Rank model says Chevron (CVX) is among the top choices.

Chevron is one of the world’s largest energy companies. It has its hands in all aspects of oil, natural gas, and geothermal energy production and is active in basically corner of the globe. This diversity means it is one of a few oil companies positioned to benefit extensively from an extended surge in oil prices, which is exactly what we have seen recently.

Higher prices have led to positive earnings estimate revisions, lifting the stock to a Zacks Rank #1 (Strong Buy). The firm also pays a healthy dividend and looks to be the perfect combination of growth, income, and momentum that will be needed to investors continue to shun risk.

Let’s first take a look at oil prices over the past three months:

A number of things have led to oil’s recent run, but the basic trend has been a tightening of supply. This has been influenced by reduced production in Venezuela, sanctions on Iran, weather, and a number of other global factors.

The above chart clearly shows a bit of a pullback in recent weeks, but the extended trend has been upward—even beyond what is shown. Heck, WTI started the year near the $58 per barrel level, so the black gold has shown a propensity to move higher and trudge through slight corrections.

This trend has, naturally, led to an improving earnings picture for Chevron:

The Zacks Rank is based on earnings estimates and estimates revisions, meaning that Chevron’s #1 (Strong Buy) designation can be attributed to the positive revisions we see in the above graphic.

According to these updated Zacks Consensus Estimates, analysts are expecting Chevron to finish the year with revenue growth of nearly 19% and earnings growth of about 123%. Growth is expected to continue into 2019 as well, with estimates for that year calling for improvements of 6% and 19%, respectively, from 2018’s projected totals.

Shares have really started to pick up pace in the past month or so, adding more than 10% after finding six-month lows in mid-September. This has helped the stock earn an “A” grade in the Momentum category of our Style Scores system.

And even though we don’t traditionally associate momentum with value opportunities, this recent surge has certainly not taken away from the value argument for CVX right now. Here’s a look at the company’s forward 12-month earnings multiple over the past year:

So oil prices have been trending higher, the stock has shown signs of life, earnings revisions have been positive, AND you are getting shares near their cheapest earnings multiple in a year? That sounds like a great deal to me; plus, you’re getting a 3.5% dividend yield on this one.

Disclosure: The author of this article maintains the Zacks Income Investor portfolio service. CVX is currently held in the Income Investor portfolio.

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