Time to Sell ExxonMobil?

Should you sell ExxonMobil (NYSE: XOM  ) today?

The decision to sell a stock you've researched and followed for months or years is never easy. If you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.

In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own personal investing throughout the Great Recession. Now, I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.

Today I'm laser-focused on ExxonMobil, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, ExxonMobil is down 8.1% versus an S&P 500 return of 11.3%. Investors in ExxonMobil are no doubt disappointed with their returns, but is now the time to cut and run? Not necessarily. Short-term underperformance alone is not a sell sign. The market may be missing the critical element of your ExxonMobil investing thesis. For historical context, let's compare ExxonMobil's recent price to its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:

Company

Recent Price

52-Week High

5-Year High

ExxonMobil $61.79 $76.54 $96.10
Chevron (NYSE: CVX  ) $81.05 $83.41 $104.60
ConocoPhillips (NYSE: COP  ) $57.43 $60.53 $96.00
Hess (NYSE: HES  ) $59.12 $66.49 $137.00

Source: Capital IQ, a division of Standard & Poor's.

As you can see, ExxonMobil is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.

Potential sell signs
First up, we'll get a rough idea of ExxonMobil's valuation. I'm comparing ExxonMobil's recent P/E ratio of 11.9 to where it's been over the past five years.

Source: Capital IQ, a division of Standard & Poor's.


Source: Capital IQ, a division of Standard & Poor's.

ExxonMobil's current P/E is slightly higher than its five-year average, which could indicate the stock is overvalued. A high P/E isn't always a bad sign, since the company's growth prospects may also be increasing alongside the market's valuation. However, it definitely indicates that, on a purely historical basis, ExxonMobil looks expensive.

Now, let's look at the gross margins trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry's facing tough times. Here is ExxonMobil's gross margin over the past five years:

Source: Capital IQ, a division of Standard & Poor's.


Source: Capital IQ, a division of Standard & Poor's.

ExxonMobil is clearly having issues maintaining its gross margin due to the decline in oil. Gross margins tend to dictate a company's overall profitability. ExxonMobil investors need to keep an eye on this troubling trend over the coming quarters.

Next, let's explore what other investors think about ExxonMobil. We love the contrarian view here at Fool.com, but we don't mind cheating off our neighbors every once in a while. For this, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 170,000-strong community of individual analysts rate the stock. The latter shows what proportion of investors are betting that the stock will fall. I'm including other peer companies once again for context.

Company

CAPS Rating (out of 5)

Short Interest (Float)

ExxonMobil 4 0.7
Chevron 4 1.4
ConocoPhillips 5 1.1
Hess 4 2.0

Source: Capital IQ, a division of Standard & Poor's.

The Fool community is rather bullish on ExxonMobil. We typically like to see our stocks rated at four or five stars. Anything below that is a less-than-bullish indicator. I highly recommend you visit ExxonMobil's stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a mere 0.7%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study ExxonMobil's debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company's taken on, relative to its overall capital structure.

Source: Capital IQ, a division of Standard & Poor's.


Source: Capital IQ, a division of Standard & Poor's.

ExxonMobil has been taking on some additional debt over the past five years. When we take into account unchanged total equity over the same time period, this has caused debt-to-equity to increase, as seen in the above chart. Based on the trend alone, that's a bad sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  ExxonMobil is currently below this level, at 14.6%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If ExxonMobil had to convert its current assets to cash in one year, how many times over could the company cover its liabilities? As of the last filing, ExxonMobil has a current ratio of 1.08. ExxonMobil could cover its liabilities, but it's still below a healthy level of 1.5.

Finally, it's highly beneficial to determine whether ExxonMobil belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by clicking here to add ExxonMobil.

The final recap

ExxonMobil has failed four of the quick tests that would make it a sell. Does it mean you should sell your ExxonMobil shares today solely because of this? Not necessarily, but keep your eye on these trends over the coming quarters.

Remember to add ExxonMobil to My Watchlist  to help you keep track of all our coverage of the company on Fool.com.

What companies would you like me to cover next in this series? Please leave your comments below.

Jeremy Phillips does not own shares of the companies mentioned. Chevron is a Motley Fool Income Investor selection. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2010, at 6:12 PM, goalie37 wrote:

    Thanks for the article. As an XOM shareholder, I am always on the lookout for new information. My only complaint with the article is your use of 2009 data. In that year we saw oil in the $30s. At above $80m now, the situation is far different. If you were to include 2009 free cash flow, the stock would be a screaming sell, but I believe that situation has changed quite a bit.

  • Report this Comment On October 09, 2010, at 2:06 PM, TEBuddy wrote:

    I dont even believe these charts. There was an oil peak in July 08 then a crash, so although there is certainly going to be some anomalous margins I still doubt the charts. this is not a good 5 year period to depict to start with, and its done this way to try to make an unfounded point for manipulating a stock the way the author's backers are playing the stock.

  • Report this Comment On October 09, 2010, at 2:13 PM, TEBuddy wrote:

    The charts are skewed by XOM investments in new oil field exploration for expansion and future revenue. So please explain why the margins are low rather than just basing all your analysis on it. They traded nice huge margin numbers for future revenue security.

  • Report this Comment On October 15, 2010, at 10:21 AM, miteycasey wrote:

    Remember people tend to invest for the now instead of thinking into the future and how the company is set to handle that future.

    The author has fallen for that trap.

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