Most investors will be happy to more than double their investment within three years. But if this was easy, everyone would.However, those who bought exxon mobil (XOM 1.21%) April 2020 witnessed a significant stock price rally. This is why so many people have missed their chance.
How much?
A $10,000 investment in energy giant Exxon stock at the beginning of April 2020 would be worth about $28,000 today. In percentage terms, the stock is up more than 180%. 2023 has just started, so the holding period here is a few months short of three years. Looking back at the meteoric rise of meme stocks in recent years (which has largely proven to be unsustainable), such a rise in just three years is simply unbelievable!
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But making the move in April 2020 required near-superhuman strength and the emotional fortitude that most investors lack. That’s because April was the worst time of the bear market due to the coronavirus pandemic. It seems like a decade ago now, but at the time, countries around the world were effectively shutting down their economies to slow the spread of new diseases for which there were no effective treatments. .
Energy prices plummeted as demand for oil and natural gas dropped dramatically. At one point, West Texas Intermediate (WTI) crude oil, the main US energy indicator, fell below zero. This was only a short amount of time, but think about what negative prices mean for the energy sector. Oil rigs basically paid their customers to take their oil. Investing in a well-known energy company like Exxon wasn’t easy when the energy market was facing serious headwinds.
just another cycle
However, oil and natural gas are notoriously cyclical commodities. The 2020 price plunge was perhaps shocking for its own reasons, but it really wasn’t far from a cyclical trend. Simply put, in the energy sector, rapid and dramatic price movements are the norm, not the exception. Exxon, with its investment-grade balance sheet, was perhaps one of the energy companies best suited to withstand the blow.
it’s not an accident. Exxon, which has existed in one form or another for more than 100 years, has seen severe cycles before, which has been proven again in 2020. It’s the fact that we’ve increased our dividend for 40 consecutive years, despite industry-specific ups and downs.
XOM Financial Debt to Equity (Quarterly) Data by YCharts
Just before the pandemic, Exxon’s debt-to-equity ratio was well below 0.20. This is a very conservative number for any company. But when the pandemic hit and energy prices plummeted, management followed a tried-and-true strategy. Indebted, his equity ratio has more than doubled. Even at its peak, Exxon’s leverage wasn’t overwhelming, but it climbed very quickly. We were able to support the business, including investments.
XOM Total Long Term Debt (Quarterly) Data by YCharts
Fast forward to today. Exxon’s debt-to-equity ratio is again well below 0.20. This is because oil prices have rebounded significantly from their lows. Exxon’s stock price rebounded, along with energy prices, and so did its earnings. And we’re using today’s profits to pay off the debt we took on to weather the downturn in the industry.
look under profit
If all you see is the massive gain Exxon stock has experienced since April 2020, you’re missing the real story. Exxon did what they always do in difficult times. We used our balance sheet as a shield to protect ourselves and our income investors. Had I known that this was simply an old successful playbook being used again, I might have had the courage to take a contrarian stance.
After all, buying Exxon stock at a time when Wall Street was busy throwing babies out in the bath water proved to be a huge financial win for investors who took the time to understand the history. it was done.