In a new feature for the site, we wanted to add a post where we weigh in with our thoughts (fundamental, technical, and options pricing and strategy) on a stock that was upgraded or downgraded in the morning. XOM is our first subject.
Argus Research upgraded XOM from Hold to Buy, and raised the price target to $104 in what it characterized as a valuation call. The stock is only up 0.3% on the news today, though it has rallied strongly in the past month. We view the valuation argument here for XOM as fair at best given its historical P/E multiple over the past decade:[caption id="attachment_32404" align="alignnone" width="502"] XOM trailing 12 month P/E, Courtesy of Bloomberg[/caption]
A 20% move up to a 15 P/E or a 20% move down to a 10 P/E seems equally likely based on the past 10 years. Of course, XOM has grown earnings for the past decade at well above the 5% annual rate expected over the next 2 years. So the valuation argument seems quite subjective, and more likely skewed to the downside than the upside. The upgrade looks more like performance chase by the research analyst after a quick run higher in XOM.
From mid-July to mid-August, XOM went on a relentless losing streak, ending lower on 18 of 19 trading days at one point (we wrote about it first here). We played for a bounce off of the crucial $85 support level on 2 separate occasions, once in August and once in October. Both of those trades were based more on the short-term technicals than the fundamentals.
Since the stock’s mid-October low of $84.79, the stock has rallied 10% in impressive fashion, partially boosted by a better-than-expected earnings report. The stock has quickly gone from very oversold to very overbought, as shown by the RSI in the lower panel:[caption id="attachment_32405" align="alignnone" width="600"] XOM daily, RSI (daily 14) momentum reading on bottom panel[/caption]
The stock is now nearing its all-time high, set in May 2008 at $96.12., just 3.5% away. The stock’s high in 2013 is $95.49, set in July. The all-time high is clear long-term resistance:[caption id="attachment_32406" align="alignnone" width="600"] XOM monthly chart, Courtesy of Bloomberg[/caption]
From where we are sitting, we do not see too many compelling reasons at current levels to chase this story on the long side. Wall Street analysts agree and remain fairly mixed on the stock with 10 Buys, 15 Holds and 1 Sell.
While we’d rather get involved on the short side, playing for a move back to the 200 day moving average at ~$90, we would much prefer an entry closer to the $95 level, but for those who think a turn is more imminent, here is a structure that looks interesting (we did not execute this ourselves):
Potential Trade Structure: XOM ($92.75) Buy the Dec 92.5 puts for 1.42 and look to spread on weakness.
Implied volatility for XOM is near its lows of the year. This is 120 day implied volatility for XOM:[caption id="attachment_32413" align="alignnone" width="600"] 120 day implied volatility for XOM, Courtesy of LiveVolPro[/caption]
Options here are quite cheap further out, so your risk of buying an December put outright is lower than normal. The stock’s recent volatility ($10 move lower from July to August, and $8 higher from October to November) is another point in favor of simply buying premium and looking to spread on weakness.