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Stepping on the Gas
Issue // January 17, 2023
UPDATE
School is in Session
By The MARK IT. Team
🌤️ Happy Tuesday morning. Many schools and universities start their spring semesters after MLK day, so for most Americans, it’s back to school and the end of winter break. Nevertheless, we hope you enjoyed your three-day weekend, and are ready to get the week started this morning.
As with most national holidays, the market was closed yesterday, but our watchlist for this week contains just one stock we think will be important to keep an eye on for the early 2023 earnings season from a value perspective.
Lastly, we have a short survey that we wanted you to complete after you read the newsletter. We have some ideas about more investing content to share with you, and we want to hear your thoughts.
WEEK IN REVIEW
A Bull’s Best Friend
via rawpixel.com
The market rally last week was a much-needed one to start 2023 off on a high note. 2022 went on record as the worst S&P performance since 2008, and many investors are hoping 2023 doesn’t take any cues from that trend.
This last week saw a 2.04% jump in the S&P from $3919.25 to $3,999.09 at Friday’s market close. Friday morning was also the start of the early 2023 earnings season with mainly bank stocks reporting Q4 2022 results before the market opened.
JPMorgan beat revenue estimates by 0.94%, Wells Fargo missed estimates by -1.87%, but most importantly: Bank of America, which we reported on in our Cashing Out newsletter last week, beat revenue expectations by 1.49% and earnings per share (EPS) by 10.87%. Suffice it to say that the stock price did not dip on Friday and held nicely.
WEEKLY WATCHLIST
Big Oil, Small Oil
via rawpixel.com
As of November 2022, US energy generation coming from total fossil fuels was 2,508 billion kWh, with renewables and nuclear reporting 815 and 778 billion kWh, respectively. These numbers represent the US Energy Information Administration’s 2021 findings, however, with US oil production expected to increase through 2023, the generation coming from total fossil fuels will likely rise as well.
Additionally, fossil fuel generation as a whole (and in comparison to renewable generation) has yet to be reported on regarding 2022 findings. Due to the war in Ukraine and an increased reliance on domestic oil, US oil companies in 2022 were pressured to supply more, which likely increased generation.
At the same time, the electric vehicle market is expected to rise throughout the decade, which leads many to believe that this will offset some of the growth of oil-supplying companies. However, it’s worth noting that a growing electric vehicle market doesn’t translate to less global or domestic oil being produced. Based on our research, these industries (consumer vehicles and energy) will operate independently of each other for quite some time.
STOCK #1
Occidental Petroleum (OXY)
Based on market cap, Occidental Petroleum is the 5th largest oil and gas company in the United States. Despite its respectable standing, the company is still much smaller than powerhouses like ExxonMobil and Chevron which are #1 and #2 respectively. Where Occidental Petroleum does take the lead, however, is valuation and free cash flows (discussed below).
Within the past year, Occidental Petroleum stock has been on a solid upward trend, gaining a whopping 81.27% in share price at the same time that the S&P 500 dropped 12.63%. The stock hit a 52-week high of $76.82 per share back in August and has cooled down to $65.31 at Friday’s close.
OXY Stock (1-year), via Google Finance
⚠️ Stagnant cash flows: The past 10 years have seen steady rises in free cash flows followed by equal drop offs shortly after. We haven’t seen consistent cash flow increases for more than 3 years, though, that may change in 2023.
⚠️ Dividend, but small: With a 0.80% dividend yield, Occidental Petroleum has a small dividend compared to most stocks that offer one. However, as we note below, what’s attractive about the stock has more to do with valuation.
✅ Undervalued according to DCF: Based on our discounted cash flow model, a single OXY stock at Friday’s market close price of $65.31 would be between 35-40% undervalued–very good news for value investors.
âś… Lower debt: Of the total Enterprise Value (EV) of Occidental Petroleum, debt is approximately 34% compared to market cap 66%.
ONE MORE THING
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