Christine Benz: Hi, I'm Christine Benz for Morningstar.com. You have until April 15 to fund an IRA for the 2009 tax year, so all this week I'm talking to some of Morningstar's experts to get their best idea for investments to put within an IRA. Today I'm joined here by Paul Larson. Paul is an equity strategist and also editor of Morningstar StockInvestor. Paul, thanks for being here.
Paul Larson: Thanks for having me.
Benz: Paul, we've recently seen in the past couple of weeks a lot of stocks drop out of 4- and 5-star territory. The analysts think the universe is pretty fairly valued overall. But you've brought us a stock pick that you think still has some pretty good upside potential from here.
Larson: You're absolutely right. The universe of wide-moat, 5-star stocks has dramatically thinned in recent months. But there is one wide-moat, 5-star stock that I think is still attractive, and that is the world's largest oil company, ExxonMobil.
Benz: Tell us why you like it, and why you think there still may be some upside potential.
Larson: In the oil industry, when you look at returns on invested capital, overall profitability, scale is definitely correlated to that.Read Full Transcript
Benz: Big is better.
Larson: The "big is better" rule of thumb. And Exxon is by far the largest oil company, and the most efficient. I also like the fundamental factor that if we do get inflation here in the United States, this is a company that is exposed to oil and, increasingly, natural gas prices, and so this is quasi-inflation-protected investment.
Benz: So as prices go up, it's able to participate from those price gains, so investors in turn enjoy that price appreciation as well.
Larson: You're absolutely right. And, frankly, the valuation is interesting. Our fair value estimate is $87, and the stock is in the high $60s and has been languishing in the high $60s for several months now. It has not necessarily participated in the market rally. And so I think that this is one that the rally has left behind, and I think there's still some value to be realized here.
Benz: One risk with any company that is exposed to the commodity price cycle is that prices could go down, or that it'll be swung around by whatever is happening in the prices of these various energy products. Talk about ExxonMobil from that standpoint, and whether you perceive to be a risk there.
Larson: You're absolutely right that they are exposed to commodity prices, but there are some hedges that Exxon has. One, they have a very significant refining operation, and that actually tends to do better in lower commodity priced environments. But I also think that the balance sheet is another big plus here. This is a AAA-rated company, both by us here at Morningstar, as well as the other major credit rating agencies.
This is a company that has a net cash position, beside having a balance sheet that has over $100 billion in assets. So you do have all those hard assets placed around the world, sitting behind your investment.
Benz: OK, Paul, thank you. It sounds like an interesting blue chip idea, and possibly a chance to get in at what still might be a decent time. We appreciate you sharing the idea with us today.
Larson: Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.