MorningWord 11/15/13: $XOM – Buffett Buys…But Likely A Much Better Price

by Dan November 15, 2013 8:54 am • Commentary

Big news yesterday evening for XOM, the second largest stock by market cap ($400 bln+) in the entire U.S. stock market.  Warren Buffett’s Berkshire Hathaway disclosed a $3.45 billion stake in XOM, the largest single stock purchase since IBM in 2011.

We wrote a Name That Trade post on Monday, with this takeaway:

We view the valuation argument here for XOM as fair at best given its historical P/E multiple over the past decade:

XOM trailing 12 month P/E, Courtesy of Bloomberg

XOM trailing 12 month P/E, Courtesy of Bloomberg

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.

Of course, we don’t have much interest going head to head with Mr. Buffett on a fundamental argument.  However, we do think that Berkshire likely bought closer to those $85 lows, and buyers up here near $95 are getting a much worse entry in comparison.

$95.49 is the high for the stock in 2013.  $96.12 is the all-time high, set in May 2008.  So a big group of eyeballs will be on the 95.50-96.50 area.  Technically, I’d be surprised to see the stock slice right through there.  But if the stock does cleanly breach that area, it could be off to the races just based on the price action of mega-caps this year who have made new all-time highs.

Interestingly, XOM’s 1.5% bounce so far in the pre-market on the Buffett news is a far cry from AAPL’s 4.75% advance after Carl Icahn disclosed a stake in AAPL in August.  Granted, AAPL is a stock with higher realized volatility than XOM, but the outsized reaction in AAPL to Icahn’s announcement is also a sign of the times.  Market participants are much more interested in the quick, outsized move, a la Mr. Icahn in NFLX, rather than the slow and steady style that suits Mr. Buffett.

One final note of caution – those who blindly followed Buffett and BRK/B into the IBM purchase in 2011 have significantly underperformed.  Buffett is one of the best in the world, but that certainly doesn’t imply that he’s always right.  Nevertheless, with new all-time highs so close, and implied volatility low, buying options looks interesting whether you want to play for a breakout or a fade back into the long-term range.  For now, we’re doing nothing, but with a keen eye out for opportunities.