Exxon Mobil Corporation (XOM), Chevron Corporation (CVX): Value Investing Isn’t Just Buying Cheap Stocks

• The cyclical trend is even more apparent in the refining industry. Marathon Petroleum Corp (NYSE:MPC) and Phillips 66 (NYSE:PSX) have made huge share-price advances over the past year, as extremely wide spreads between crude oil prices in the U.S. and abroad have led to unusually high profits for refined-product sales. Now, though, analysts have increasingly concluded that a combination of rising costs, greater regulation, and narrowing spreads will lead to falling profits, making current P/Es based on trailing earnings artificially low if they turn out to be right.
• You can find similar trends in other industries as well. Even in the traditionally high-growth tech industry, many sector giants have seen their P/E ratios plunge as earnings growth has slowed to a standstill. Dell Inc. (NASDAQ:DELL) is one of the most notable of these companies, with explosive growth during the 1990s having given way more recently to the PC bust and concerns about the viability of its business model going forward. Its share price has fallen so far that some value investors believe that the stock is a good prospect even with its business challenges, but failing to take projections of further headwinds into account when assessing the stock will certainly get you in trouble.

Conversely, you can sometimes find great values even among stocks with high P/E ratios. As long as earnings are growing quickly enough, a stock can justify an extremely high earnings multiple, at least for short periods of time. Obviously, paying too much for a high-growth stock doesn’t make sense, but you can’t focus on a given P/E level and have it work for every stock.

The right way to find value
Value investing is a useful tool for your arsenal of profitable investing methods, but it only works well if you can pin down what truly represents value. Trying to simplify value investing too much will get you into trouble, especially once you discover that many of the cheap stocks you run into in your research are cheap for very good reasons.

Tune in every Monday and Wednesday for Dan’s columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

The article Value Investing Isn’t Just Buying Cheap Stocks originally appeared on Fool.com is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron.

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