Today, we’re going to take a page from the playbook of one of the world’s greatest investors.
That of Sir John Templeton.
You’ve heard me talk about him before – but just in case that’s a new name to you – Templeton was famous for buying at what he called points of “maximum pessimism” – meaning when the markets were going or widely believed likely to go to hell in a handbasket.
For example, Templeton purchased $100 worth of every stock that was trading below $1 per share on the New York and American Stock Exchanges in 1938, on the eve of WWII. In total, he purchased 104 stocks for $10,400 – 34 of which were bankrupt at the time he stepped up.
Less than four years later he sold ’em all for a return of more than 400% as the story goes.
Templeton would subsequently found the Templeton Growth Fund (TEPLX), and over the next 25 years, he had a hand in creating numerous, highly successful international investment funds; nearly all of which relied on some form of buying during times of seemingly impossible market stress or social angst.
According Franklin Templeton Investments, every $10,000 invested in the TEPLX from its inception on November 11, 1954, would have grown to $13,421,683 (sales charges excluded), as of February 28, 2018.
That represents a 134,116.86% increase.
In 1999, Money Magazine called him “arguably the greatest global stock picker of the century” – a moniker I think he truly deserved.
Today, I have no doubt that he’d recognize the signals we talk about constantly – the prospect of a “hot war” on the Korean Peninsula and in the Middle East, hopelessly divided social norms, and a European Union that’s failing. And, I think he’d conclude, as we do, that many people are pessimistic about the market’s prospects, when in reality, there are still very profitable companies just begging for the right investment out there.
I also believe Templeton would expect more volatility ahead, just as I do and, again, as we have talked about frequently in recent months.
Which brings me back to your personal “Templeton” moment.
WTI oil prices, in particular, have fallen 5.58% since last Monday and are trading at $68.21 a barrel, as I write. And, quite recently, WTI prices fell a stunning 7.63%, peak to trough, from May 21 to the 29, when WTI traded at a high of $72.24. That doesn’t sound like much compared to the nearly $120 a barrel we last saw in 2012-2013, but it’s still significant.
Every energy-related company has been pummeled in the ensuing falloff, including one of the most powerful of all, Exxon Mobil Corp. (NYSE:XOM).
The company is the largest descendant of what may just be the most notorious oil company in America’s history, John D. Rockefeller’s Standard Oil Company. In more ways than one, Exxon Mobil is also a global lightning rod.
Yet…
- Exxon is trading at $81.24 or 9.03% down from highs set in January at $89.30 a share, even though global oil demand continues to increase.
- Net income stood at $19.71 billion for the period ended 12/31/17, which puts it ahead of several key competitors – including Royal Dutch Shell plc (NYSE:RDS.A) and Valero Energy Corp. (NYSE:VLO) which came in at $12.97 billion and $4.07 billion, respectively, for the same period.
- The stock’s price reflects a juicy yield of 3.99% with a payout ratio of 68.9% and 36 years of strong dividend growth. It’s actually paid a dividend since 1911 and holds a AAA bond rating from Moody’s.
- And last, but by no means least, the company’s stock price – which bottomed at $72 in 2015 – has not kept up with the price of oil, which tells me traders have missed out on one of the great companies that’s trading at a discount.
To me, it’s a perfect “Templeton” play because people believe oil is a thing of the past.
The world is growing, and there will be a projected 9.21 billion people by 2040 – all of whom will need oil and natural gas for decades to come, whether they like it or not. Global consumption will rise by 20% through 2040 to roughly 118 million barrels a day, according to Exxon’s projections.
The premise is simple.
Exxon is the only major oil company investing to boost output. Management intends to double earnings in the next 10 years and the only way they can do that is to fuel – pun intended – consumption by correlating economic growth to energy production.
Ergo, they’re on the offensive, which means the company’s stock price is far more likely to rise than fall as investors come to terms with future revenues.
By contrast, competitors are trying to inflate their stock prices by returning capital to shareholders and streamlining investment. To them, earnings are a by-product – not the end result – and there’s a big difference which suggests competitors will be caught flat-footed as demand increases.
In closing, there are a million different reasons not to “like” big oil and to be scared about the markets. But, there’s only one “recipe” for bigger returns:
Buy low, sell high…
… preferably at points of maximum pessimism.
Just as Sir Templeton did.
Until next time,
Keith Fitz-Gerald
Source: Total Wealth Research