Chevron Corporation (CVX), ConocoPhillips (COP): Looking At Market Multiples

Page 1 of 2

Looking at the stock market today, you’ll find major market benchmarks like the Dow and S&P 500 trading at all-time highs. That has many investors reluctant to get into the market, fearing that they’re paying too much for stocks. But just because the market is setting records doesn’t mean that value investors have to give up on stocks entirely. In fact, by some measures, today’s stock market is quite reasonably priced.

Looking at market multiples
Fundamentally, what determines a stock’s value is what the company expects to earn in the future. When earnings prospects are good and growth appears strong, investors are willing to pay higher multiples to current earnings in order to buy shares. When future earnings become more uncertain, then shareholders aren’t willing to pay as much today for what could be slower growth tomorrow.

With the Dow and S&P having soared between 125% and 140% since their 2009 lows, it’d be reasonable to assume that their earnings valuations would be somewhat lofty right now. But that’s far from the case:

Source: Author chart based on quarterly data from S&P Dow Jones Indices.

As you can see, multiples based on operating earnings are fairly low compared to their historical levels, and the recent run-up in stocks hasn’t lifted those multiples as much as you might expect. Moreover, when you look at earnings as reported rather than operating earnings, the effect is even more pronounced due to the plunge in earnings during the financial crisis in 2008 and 2009.

Chevron Corporation (NYSE:CVX)Not all analysts think you should look at quarterly multiples in isolation like this. Economist Robert Shiller, for instance, has championed the use of the cyclically adjusted price-to-earnings ratio, which looks back at earnings over the past decade to come up with an average earnings figure that smooths out short-term changes. Whether that’s appropriate for valuing stocks today, though, depends on whether you think future crises like we saw in 2008 are inevitable.

Finding bargain stocks
Even if you think the stock market today is overvalued, you can still find individual stocks that look much less expensive. Energy stocks in general carry relatively low multiples, reflecting concerns about future production and oil and gas prices. Yet even while some large oil companies have struggled, Chevron Corporation (NYSE:CVX) has been more successful than most at finding ways to seek production growth through a combination of aggressive and opportunistic asset purchases along with new discoveries in key areas like Australia and the ultradeep zone of the Gulf of Mexico. Similarly, ConocoPhillips (NYSE:COP) has identified the Canadian oil sands as well as the U.K. and Norway as being major contributors to production growth in the coming years. Both companies have P/E ratios in the 9 to 11 range.

Meanwhile, even the soaring financial sector remains full of interesting valuation plays. JPMorgan Chase & Co. (NYSE:JPM) has been under fire for leadership issues lately, but with its earnings multiple of less than 9, investors aren’t giving the bank much credit for the earnings recovery it’s been able to manufacture in recent years. Similarly, Wells Fargo (NYSE:WFC) will have to deal with the potential slowdown in mortgage activity and its effect on its bottom line, but a P/E of 10.9 looks attractive even if earnings growth gets more sluggish.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!