As investors, we can do all the homework necessary to find opportunities. But sometimes the game gets rigged – pun intended – thus putting us in danger. My mission today is to suggest that there are stocks to avoid in the energy sector.
It will be a difficult sale because the prices there are incredibly strong. My contention is that they are too strong and not for good reasons.
Wall Street is not an equal opportunity framework, which is fine to some extent. But sometimes the gravity of the situation creates too great a risk for players at home. They should exit a trade, especially when there are warning signs.
First, it’s important to know that I’m not a perma-bear. In fact, when investors ran away from two of the stocks today, I jumped in. I did it during the pandemic crash and then last September. This last transaction alone generated a 35% increase. Obviously, I have no hidden agenda other than suggesting booking profits. Success starts with seizing an opportunity in front of the masses. But also, it often heavily depends on knowing when to quit the game.
Let’s review some facts about oil consumption trends. Entering the pandemic, the world oil consumption increased by 1.2% per year between 2006 and 2019. This is by no means an explosive trend. Then the world stopped working in 2020 and it fell into a pit. Currently, consumption is still lower than 2019.
Add to that that all major automakers have pledged to end production of fossil-fuel vehicles within a decade. This will likely severely lock the oil consumption growth curve. In addition, zoom and telecommuting have greatly reduced the daily foot traffic of businesses. Check around your personal situation and you will probably realize how much less we all drive.
All major governments have openly committed to going green at all levels with solar energy. The pursuit of low carbon footprints is now a growing trend. Alternative energy sources like solar power are likely to become more ubiquitous, reducing the need for fossil sources. Whichever way you slice it, the world has unequivocally decided to use less stuff. The long-term demand story is not one that suggests a boom.
Meanwhile, oil stocks have exploded in a frenzy that is unlikely to end well. Today I present to you three stocks to avoid in case the music stops playing. I’m not suggesting shorting these companies, rather avoiding them or making a profit. They are:
- Chevron (NYSE:CLC)
- Exxon-Mobile (NYSE:XOM)
- Whiting Oil (NYSE:CMU)
Stocks to Avoid: Chevron (CVX)
In the depths of the pandemic crash, I wrote about a CVC stock bullish opportunity. Part of my thesis was that this is a quality company that pays a great dividend. Moreover, the CEO openly defended the dividend all the way. It was $33 less and now the situation has gotten too bloated for my liking. Since then, the yield has dropped significantly, resulting in a better risk-reward stock. AT&T (NYSE:J) comes to mind for one, which still pays 8%.
At the start of the pandemic, gross profit of $19 billion in 2019 was almost half of that of 2014. Clearly, the fundamentals were already deteriorating even when we had none of the current shifts in consumption. Telecommuting was still a joke then, and the world was only half determined to find greener ways. This means that the fundamental situation is now much more difficult than in 2019, but the oil stock cannot stop recovering. It makes no sense, so the least I can do is put this one in the basket of stocks to avoid.
I don’t mean to be short, because clearly we are dealing with illogical behavior. This is a fight to be avoided completely since we are clearly missing a piece of the puzzle. And here’s the shock: for one trade, if CVX stock hits a new all-time high (above $136), it could climb much higher. This would be a technical opportunity for those who can trade quickly. Otherwise, I would consider re-engaging long when it breaks into support near $106 per share. It may take some time to get there, and so on.
Exxon Mobile (XOM)
Almost everything I noted about CVX stock above applies to a tee here. Therefore, it is not shocking to learn that I also shared bullish opportunities on the larger declines. The argument has always involved the healthy dividend and management’s commitment to it. Both companies immediately reduced their investment programs to preserve cash during the crisis. And they also guaranteed to have more expenses that they could cut further.
I have absolutely nothing against the success of these two companies. Between XOM and CVX, I would cut CVX stock first. XOM stock is nowhere near as high as Chevron. For some reason, XOM stock remains 31% below its all-time high. The problem is that he comes up against big previous failure points. There are resistance levels of pre-pandemic price necklines. Additionally, there is the problem of the large supply above $80 per share. They say the price is the truth, well that’s where the heaviest volumes have been at least since 1981.
I liked owning XOM stocks from lower tiers and it was a two-pronged trade setup. At the time, he had suffered major falls due to temporary problems. Additionally, it offered its owners a 9% reward to get started. Now that yield has fallen to 4.9%. Although still healthy, it is no longer exceptional. This is all the more true if I am right about his precarious position. Having a 5% reward is no good if the stock goes down and costs you more.
Stocks to Avoid: Whiting Petroleum (WLL)
Of the three today, this is the one I like the least for a long time. I remember helping a friend deal with a loss in 2020 when WLL stock was crashing. Now it is collapsing and for no apparent reason. The company went bankrupt in 2020 and then came out and returned to the public the same year. Since then, its stock has continued to break records. It’s the kind of mojo that puts it at the top of my list of actions to avoid forever.
Ignore my opinion and let’s get the facts straight. The stock is now 170% higher than its first week back in life. During this time. its sales are less than half of 2014 levels. Don’t confuse my caution about inventory levels with the declining health of the business. He registers sales and also realizes some. My beef is with stock WLL elevation and nothing more. I’m sure the company is doing its best to make this comeback a reality.
Earlier, I sounded gloomy about the outlook for fossil fuels. The truth is that I am realistic about ESG progress in general. I bet the conversion will take decades, not years, and we will continue to need oil. Electric vehicles will not replace the internal combustion engine. Current levels of battery production are unlikely to produce 90 million new vehicles per year. However, my warning today is that this rally in energy stocks may come to an abrupt halt.
Here’s another thing to consider that could hurt these three stocks to avoid. Indices are near record highs and experts are warning of market tops. Although I disagree, their warnings aren’t that crazy. If we do experience a market downturn, investors will sell the foam first. This is where the LIFO (last in, first out) method could decimate these three lagging stocks. I would rather miss upside potential than be the last bag holder.
At the date of publication, Nicolas Chahine had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Nicolas Chahine is the Managing Director of SellSpreads.com.