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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Phillips 66

January 17th 2016
Phillips 66
NYSE Symbol: PSX
Industry: Oil
Price as of 1/15: $78.47
Maybe 2015 wasn't so bad after all. 2015 closed down a little over 1% or up a little less than 2% when you include dividends. Since the end of 2015? Blood bath. A 6% decline to start the year, the worst one-week decline for the markets since the week ending August 5, 2011.The worst five trading days to start the year, Ever in the history for both the S&P 500 and the older Dow Jones Industrial Average dating back to 1896. This past week wasn't much better with a 2.2% decline for a total of over 8% to start the year. If you include the last week of December, the three-week decline was the worst since the fall of 2008 or the height of the financial crisis when Lehman Brothers was allowed to fail. When you put the stats in that perspective, it would seem like the selloff is over done at least in the short term. January is on track for its worst month since February 2009, a month before the last bear market ended.
Over the next three weeks, fourth quarter earnings will be reported and while the numbers won't be pretty, they should be good enough. outside of oil, things aren't terrible. Once a company reports their earnings, they'll be allowed to buy their stock once again. Remember, outside the oils, most S&P 500 companies are generating the best free cash flow ever with balance sheets in some of the best shape they've ever been so we might see a nice bounce or at least a stabilization in the stock market in the coming weeks. China and oil will have a lot to say about that.
In the meantime, valuations for many blue chip companies and the index are getting better and better. Based on what many analysts expect S&P 500 to earning this year, the index is trading for 16 times earnings and possibly 14.4 times 2017 earnings. Individual stocks look even cheaper. All the stocks we highlighted at the end of the year are even more attractive. Ford announced a special dividend on top of its regular dividend. In a little over a week, Ford will go ex-dividend for 40 cents or 3.3% based on its stock price.
For at least the last six months I've been urging clients to avoid commodity stocks in particular oil stocks. In December I finally highlighted three stocks, Exxon (XOM), Chevron (CVX), and Conoco Phillips (COP). All three are committed to maintaining their dividends. Chevron and Conoco are down sharply since then, but Exxon is only modestly lower almost unchanged since mid-December. In fact, Exxon is still up over 15% from its August lows last year. Only a few oil stocks are higher since the August lows including this week's featured stock, Phillips 66. A spin off from Conoco Phillips, Phillips 66 is known as a Midstream transporter of crude oil along with being a refiner. Like most refiners, Phillips 66 fundamentals have remained strong with earnings expected to only fall modestly year over year. With stocks down a lot or going through a downturn, it's always hard to gauge when's a good time to buy, but one great indicator is insider buying. This week it was disclosed an insider holding 10% of Phillips 66 stock was buying even more. The Phillips 66 insider buying was none other than Warren Buffett. Back in September it was disclosed that Warren Buffett had taken a $4.5 billon position in the energy stock. In a series of purchases in the past week, Buffett bought more than 3.5 million shares for a total of $267.25 million. That buy followed major purchases the prior week giving Warren Buffett an extra $700 million in stock boosting his overall position to 12% of the outstanding shares.
Warren Buffett has made a career of being right. In the last crisis Buffett made billions from GE and Goldman Sachs. I suspect he'll do the same from this crisis as well. Currently, Phillips 66 trades for 11 times earnings with a 2.8% dividend yield. Buffett's purchases may not signal the bottom for oil just like his purchases of GE and Goldman did not signal the bottom for the financials, but longer term Buffett and shareholders should make some good money from these levels.