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Bull Of The Day: Chevron (CVX)

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Energy prices have surged out of the medically induced global economic coma with a vengeance. However, the worldwide uptick in COVID cases has the market nervous, and the recently implemented pandemic restrictions in Europe have compressed energy prices. Now an excellent trading opportunity appears to be presenting itself in this sector.

Chevron (CVX - Free Report) and its best-in-class operations provide the perfect way to buy the dip in this momentum-charged sector with the highest return potential. The blowout Q3 results that CVX unveiled at the end of October catalyzed a slew of analysts upgrades, driving up EPS estimates across time horizons and propelling CVX into a Zacks Rank #1 (Strong Buy).

Recent Events

WTI crude oil took a tumble in the wake of these latest COVID lockdowns in Austria (many believe it won't end with Austria), as traders pull profits on this hot commodity after failing to break out above $85 a barrel last week. Coming off a 7-year high, crude traders are now using 2018's highs around $76 a barrel as a support level.

Global demand outlooks are drying up a bit, but with OPEC sticking with its leisurely output revival, I expect oil prices to remain above the $70 handle into what's expected to be a cold winter.

In the past few sessions, global concerns about a pandemic resurgence is impacting global crude demand outlooks putting pressure on Chevron's stock. However, there has been a wave of momentum behind energy stocks since late August, and this marginal dip is an excellent opportunity to get a bit of exposure to the space.

Investors have been avoiding oil stocks like the plague, with the future of oil being so uncertain and years of disappointing returns. Yet, some of the best-positioned oil companies are poised to provide us with the high-yielding returns we are looking for. 

The outlook for crude remains a subject of debate. Still, many analysts remain bullish, with Bank of America (BAC) along with several other respected analysts citing a $100+ near-term price target for this lucritive commodity.

Why Chevron?

Chevron is an energy powerhouse. With its savvy purchases across the Permian and Marcellus basins, the enterprise has established itself as a leader in the US oil industry (2nd largest US energy company behind ExxonMobile). I dare to call CVX an oil growth stock, but it has all the makings of a long-term winner. 

I can assure you that the world economy is far from kicking its oil addiction. Demand for natural gas and oil will continue to rise over the next decade with energy needs, and CVX is poised to drive substantial profits throughout the roaring 20s. 

I deem that Chevron's 4.7% dividend yield is almost as safe as US Treasury Note. The oil industry's commitment to maintaining its dividend no matter the financial adversity (short of bankruptcy) is unprecedented. Chevron has proven to have the liquidity to support its endlessly growing yield in even the most devastating economic environments. Chevron maintained its dividend through the past 18-months of economic shutdowns and actually raised its quarterly payout in Q2, which none of its major competitors can boast of.

The firm has already returned to pre-pandemic profitability levels, remarkably faster than most of its competitors, yet its share price remains below its pre-COVID high in January 2020.

ESG Investments

Chevron is tripling its carbon curbing spending. This energy pioneer is investing $10 billion over the next 6 years to develop biofuels, hydrogen production, carbon capture, and other low-carbon technologies. The word sustainability has been lighting up the market ether like never before, with the existential threat the pandemic posed to the world causing market participants to think a little differently about where they are investing their money.

ESG investing has taken precedence in this new market, and virtually all energy companies fail to meet the prerequisites for this type of stock picking. Chevron is aware of this trend and is making an effort to come back into market favor with these investors. Not to mention sustainable practices can be very rewarding in the long run if appropriately executed.

Final Thoughts

The last time crude was trading north of $70 a barrel, CVX was a $125 stock, so what is causing this discount today? The escalating focus on ESG and sustainability has pushed money management away from this sector, which has developed a spreading taboo perception about investing in oil & gas companies. The pandemic only accelerated this investment inclination towards sustainability. Once crude prices materially break back above $80 a barrel, it will be impossible for traders to ignore the opportunity here.

CVX is looking ripe for a buy today as momentum begins to push this stock back into market favor. CVX is trading just above $110 a share, which appears to be a short-term support level. 12 out of 17 analysts rate CVX a buy today (no sell ratings), with recent targets sitting between $125 and $150, representing an upside between 12.5% and 35% from here.


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