People Still Hate These Stocks
Like most kids, stepping out into a fresh Baltimore snowfall, the first thing my son would do is start packing a snowball. Ever the obliging father, I would give him an unflinching human target.
But of course, a one-way snowball fight isn’t that much fun. Strangely, until he was 11 or 12, the fun of the two-way snowball fight usually ended pretty quickly…
I can only assume it’s a common parenting moment – you think “I’ll just nail him in the leg.” But then it’s amazing how quickly the brain can analyze the arc and speed of the snowball as it leaves the hand and send the message “Oh no…”
Right in the face.
Of course, the first time I hit one of my kids in the face with a snowball, it was my daughter. She was probably 5 or 6 (two years older than her brother). I obviously never learned my lesson…
So I thought I had a pretty good template for what was likely to happen when I saw on the news that Iran launched 300-some drones and missiles at Israel this weekend. The parenting Law of the Snowball had me thinking “Oh no…”
But just like how my son’s defense got better around age 11 or 12, Israel’s Iron Dome (aided by the U.S., Jordan, and others) prevented disaster.
It’s not very often we get to use “Iran’s government” and “reasonable” in the same sentence. This looks like one of those rare times. Because within minutes of launch, and a couple of hours before any drones would make it to Israel, Iran said “That’s it, we’ve achieved our objective, no need to retaliate.”
Iran telegraphed what it was going to do and announced the attack was underway with plenty of time for Israel and its allies to counter. Now Israel can go back to its assassinations and Iran can keep funding Hezbollah and the Houthis, no harm no foul.
Oil’s Next Move
You can often tell how serious some macro event is by the way assets react. Like oil.
Even as I was writing to you on Friday that oil and oil stocks were pricing in some war-related risk, oil finished Friday in the red. And it’s lower today, too.
And that’s because Iran telegraphed its “attack” on Israel.
Now we get to see just how much risk premium traders want to put on oil prices…
I suspect the factors that have taken oil into the $85 – $90 range will remain in effect.
- Even if Iran stands down, there’s no reason to think its proxies will. I’d expect the Houthis to continue to wreak havoc in the Red Sea, especially given that the Houthis are letting Russian and Chinese ships pass. I’m sure the Iran/China/Russia alliance enjoys this.
- As Christian DeHaemer wrote a couple weeks ago, Ukraine’s ability to hit Russian oil infrastructure far from the front is making a dent in Russian supply. The potential for further supply disruptions and higher prices is so great that U.S. Secretary of Defense Lloyd Austin has asked Ukraine to stop hitting Russian oil infrastructure. Pretty ballsy ask, “even though the U.S. isn’t helping you anymore, could you do us a favor…?”
- US retail sales came in better than expected this morning, prompting a revision of GDP growth 2.4% to 2.8%. The strength of the economy is usually a pretty good catalyst for oil prices.
Earnings Are Strong With This One
Oil prices do not have to spike to $100 for oil stocks to do well. Exxon-Mobil (NYSE: XOM) hit a new all time high on Friday, even though oil prices did not. It’s because Exxon’s earnings are growing nicely, it bought back $17 billion in stock last year and will buy $20 billion this year and the 3% dividend is due for a boost.
It is basically the same story for most mid- and large-cap U.S. oil stocks. They benefit from higher oil prices, there is virtually zero threat to their own production, they are buying back shares and they have solid earnings growth and dividend yields.
Plus, they are cheap because people don’t like oil stocks.
I’ve written about Devon Energy (NYSE: DVN) here and here.
Devon pays a fixed and variable dividend. Last quarter, it was even split – $0.22 for the fixed dividend and $0.22 for the variable dividend. That suggests a forward yield of 3.3% – which is the lowest Devon has yielded in a couple of years. I bet we see an increase in the variable part of the dividend when it reports earnings on May 1.
Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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