After a decade of failure before Exxon Mobile (NYSE: XOM) shareholders, the Dow Jones Industrial Average announced the ultimate insult. The positive of the removal of important share information is the potential for the move to ignite a fire under management for change. My thesis is not ready to turn ultra-bullish on the stock, but any major sale could generate a tradable bottom in a new week.
Image Resources: Exxon Mobil Web Site
Positives for index removal
On August 24, the DJIA announced the removal of three shares from the index effective August 31 in a major shakeup for the index of 30 leading stocks. The index will remove Exxon Mobil, Pfizer (PFE) and Raytheon Technologies (RTX) in favor of Salesforce.com (CRM), Amgen (AMGN), en Honeywell International (HON).
As usual, the move is precarious, as a stock like Salesforce recently rose enormously with the 26% rise on Wednesday after strong earnings. At the same time, Exxon Mobil is down nearly 40% for the year, and Raytheon is also down 50% this year. Taken together, one can see a big discrepancy between the performance of the related stocks over the last three years led by the nearly 200% gain of Salesforce and the nearly 50% loss of Exxon Mobil.
Data provided by YCharts
One who sees such movements in highly respected companies should normally look into taking a few of the trade. Is Amgen now really the biopharmaceutical preferred over Pfizer, and is Salesforce a buy after that big profit?
A lot of research has shown that stocks that have been removed from large indices perform better over the next year or so. The evidence shows that index stocks are stripped after periods of underperformance followed by another definitive sell-off as follow-up funds are required to dump the stock. The movement makes in many cases a manageable bottom.
Research from WSJ Market Data Group back in 2018 highlighted how shares removed from the DJIA were the additions over the first year. The research group found that the 17 stocks that left the index since 1999 saw much smaller losses over the first year of 0.6% against the large 8.0% loss of index participants.
The most recent five changes prior to 2018 are an absurd 43% increase, while the additions only gained a meager 3% gain. The recent addition of Walgreens Boots Alliance (WBA) and General Electric (GE) were a similar path down, with GE for the year until the coronavirus transmitted the apple cart.
Exxon Mobil has already drowned to $ 40 over the news and concerns over Gulf of Mexico oil production disruption by Hurricane Laura are not helping the stock. The energy giant has been in the index for 92 years and has failed in recent decades, leading to the launch of the S&P 500 on 31 August.
Catalyst for change
My previous research highlighted the case for dividend cutting, and shareholders should now consider all options on the table following this historic insult by the S&P Dow Jones Indices. The recent decisions to focus on maintaining the dividend at all costs when cutting investments have clearly not rewarded investors and attracted capital.
The recent 50% dividend cut by BP plc (BP) could change the thinking of Exxon Mobil. The company has built up a large debt level in recent decades, in part causing the negative stock to return. As of Q2, Exxon Mobil has $ 57 billion in net debt with low energy prices and high dividend payouts that will only lead to more loans in the short term.
Data provided by YCharts
While the company has accumulated debt, the return on invested capital (like ROIC) has fallen. Another catalyst for change is the business and sector change of investment decisions that only achieve lower energy prices. Exxon Mobil should start chasing projects that lead to higher values for existing assets against the constant race to the bottom inherent in scale drilling.
Data provided by YCharts
If the company can change capital decisions to focus on better outcomes for shareholders, the stock will finally have something upside down. Removing the key DJIA and a decade of failure should lead to change.
With analysts’ opinions on the stock, Exxon Mobil has had the worst Bulls on the stock in the last five years. Analysts actually have more bearish ratings at 5 against only 3 bullish ratings. Again, this is another sign of an extremely defeated stock ready for a catalyst for a rally.
Source: Looking for Alpha Ratings
Take away
The main investor is, Exxon Mobil is a very sluggish stock with the least recent returns of the shares being removed from the DJIA. The energy giant is here ready to make the typical trading bounce, as most stocks that have been removed from the index over the last 20 years.
The real catalyst for better shareholder returns is changes by the company in how they invest capital and return it to shareholders. Until actual business change takes place, the stock is only a buy for a trade after a further dip in the high $ 30s when the removal of the index takes place on Monday, August 31st.
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Statement: I / we have no positions in named shares, and no plans to take positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose share is mentioned in this article.
Additional unlock: The information contained herein is for informational purposes only. Nothing in this article should be taken as an application for buying or selling securities. Before buying or selling shares, you should do your own research and reach your own conclusion or consult a financial advisor. Investing involves risks, including loss of principal.
