Contrarian investing is the art and science of buying when everybody else is convinced a stock can only move lower. But it’s not just about zigging when someone else is zagging – it’s about buying when almost everybody is selling.
With that in mind, we’re recommending a big oil stock that’s the perfect contrarian play today…
Contrarians look for the maximum pessimism in the market, either for an individual stock or the market as a whole.
The best example was at the end of the bear market following the financial crisis. At that time, the markets were in free fall, but in March 2009, sentiment as measured by an American Association of Individual Investors survey reached 70% bears. Almost three-quarters of all small investors surveyed expected stocks to keep falling for the next few months.
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It was a great buy signal. After all, since everyone was so fearful, theoretically they already sold their shares, leaving nobody left to sell more. Supply dried up. At the time, investors were presented with some of the best stocks to buy, but most were too nervous to jump back into the markets.
Super investor Warren Buffett calls that “buying when everyone else is fearful.”
In the 18th century, British banker Baron Rothschild said that “The time to buy is when there’s blood in the streets.”
Money Morning Chief Investment Strategist Keith Fitz-Gerald agrees and found one blue-chip stock that fits this bill.
First of all, let’s talk about its sector of the market: energy.
West Texas Intermediate (WTI) oil prices are down 9.94% since May 21 and closed Tuesday at $65.06 per barrel. This wreaked havoc on oil stocks, with the benchmark NYSE Arca Oil and Gas Index falling 5.79%. In contrast, the S&P 500 is up slightly (1.08%) over that same span, even including the trade-war-induced decline this week.
Clearly, the stock market decided to punish the energy sector. But that’s where contrarian thinking comes in.
One oil stock in particular really caught Fitz-Gerald’s eye. And it is down 9.63% from its January high.
The Best Oil Stock (and Contrarian Stock) to Buy Today
The stock giant Exxon Mobil Inc. (NYSE: XOM), and it’s trading at a steep discount right now.
Here’s what Fitz-Gerald dug up about it.
- Exxon is down even though global oil demand continues to increase.
- Net income stood at $19.71 billion for the period ended Dec. 31, 2017, which puts it ahead of several key competitors – including Royal Dutch Shell Plc. (NYSE: RDS.A) and Valero Energy Corp. (NYSE: VLO), which came in at $12.97 billion and $4.07 billion, respectively, for the same period.
- The stock’s price reflects a juicy yield of 4.06%, with a payout ratio of 68.9% and 36 years of strong dividend growth. It’s actually paid a dividend since 1911 and holds a AAA bond rating from Moody’s.
- And last, but by no means least, the company’s stock price – which bottomed at $72 in 2015 – has not kept up with the price of oil, which tells him traders missed out on one of the great companies that’s trading at a discount.
In short, it is a great company that was pummeled.
Think about this – demand worldwide for energy continues to grow as the global economy recovers. Global consumption will rise by 20% through 2040, to roughly 118 million barrels a day, according to Exxon’s projections.
And Exxon Mobil is the only major company investing to take advantage of that trend. When these investments come on line and start to pay off, the share price will only rise.
The company is not playing accounting tricks to boost earnings. It is boosting earnings the old-fashioned way by developing its products and processes.
With that sort of growth potential, it’s no surprise the stock has a Money MorningVQScore™ of 4 – our top score – making it one of the best buys on the market right now.
The fact that the market does not quite see that yet as it sold off on fears – trade wars, rising interest rates, etc. – means contrarians have a great opportunity here. And XOM’s beefy dividend will pay you while you wait for the market to realize its potential.
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