Why Exxon Should Be A Strategic Part Of Any Portfolio

I don’t often write single stock tips because while they are popular it’s not a format I enjoy myself. Investing is a game best played with diversification, and diversification works because it irons out mistakes and bad luck. Even if it does iron out occasional brilliance and good luck as well, it’s worth it to be able to dodge the odd fatal bullets.

However, I did write about Exxon back in December 2020 when this was the price:

It’s now up to here:

I’m not writing this as a victory lap, no, no, no. I’m writing this because sometimes an investment case is just so obvious you wonder why it even exists and hasn’t long been eroded away.

Exxon is still paying a fat dividend of 4.2%, and while not quite covering your currency debasement, that certainly blunts it. It also underlines that the stock is “cheap.” A share that is so loved all it needs to garner investors is a tweeting CEO can be excused as being expensive, but a stock that has to disgorge a sizable chunk of itself every month to just have to hang on in there clearly does not have much of a fanbase. What it does have, however, is the business to pay for such incentivisation, which is 800% more meat than Apple needs to toss to the hounds of investment.

So why hold Exxon or buy more when it has doubled since my last article about it? This will seem like a strange question to many inured to one-way bull markets, but for value investors, if a stock goes up 30% traditionally it’s time to say au revoir.

Commodities are the real money. Unlike currency you cannot quickly magic them from nowhere. When they go down in value that is deflation and it only comes from grinding technical advance, which is not something that can be accelerated by much. Monetary inflation therefore raises commodities in nominal terms. They did not get more expensive, you got poorer. What has happened and what continues to happen is governments took action against Covid and the economies of the world took a 20% wealth haircut. The governments printed currency to bridge the economic abyss, so it seemed that nothing bad had happened on the face of it. That new money created inflation so prices rose while our “wealth” remained numerically similar and thereby the loss of real wealth slides into the economy.

Now we have the pressure of war to keep that “necessary” debasement going. But even without the abomination in Ukraine, the inflationary process is baked in and will take a few years to pass through the system.

Commodities will maintain their intrinsic value because their increasing costs in debased currency cannot be escaped.

Oil is the very base of the commodity pyramid because as every smart Marxist knows, energy + stuff = things and that primal driver just got horribly disrupted.

Grossly, you can’t fight a war if you are powered by windmills.

The war in Ukraine and the strategic conflict it has initiated can only drive fossil and nuclear power back into primacy as the issue of sustainability is supplanted by security and economic strategy is replaced by geopolitical tactics.

Oil is going from zero to hero unless there is a miracle in Ukraine or more accurately Russia, and while the market like WWI propaganda is dreaming of “home by Christmas,” it is unlikely to be the Christmas they are hoping for.

Until the likes of Exxon are paying sub-2% dividend, oil companies are going to remain a bargain because unless something amazingly positive suddenly occurs we are entering an era of gritty conflict where the luxuries of cities of glass and 100 year environmental strategies will become symbols of a gilded age.