In recent weeks volatility in the stock market has increased markedly. With rising geopolitical tensions in the Middle East, interest rates pushing 16-year highs and every other economist warning about the impending recession, it is no wonder investors are getting nervous.
But there is a secret all seasoned equity investors know; stocks almost always climb the wall of worry. And, even if there is a bear market, it is eventually followed by above average returns.
So, the solution is to build a portfolio of stocks that consistently grow earnings and hold on for dear life. Then, when the market gets ugly, open your wallet, and buy more great stocks at a discount.
In this article I will cover two stocks that boast incredible past returns, and strong future return expectations. They are both trading below their historical average valuations and enjoy powerful secular tailwinds.
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Mind Blowing Long-Term Returns
I want you to guess the total returns of the US stock market since 1900. Have a number in your head? It’s probably below the real number.
If you invested $100 in the S&P 500 in 1900, today it would be worth $10,500,000. That is a nominal return of over 10,00,000%!
Over this period there have been two world wars, presidential impeachments and assassinations, and countless financial crises, as well as some 30 odd bear markets. And yet the market persists higher regardless.
It should be noted that the actual S&P index wasn’t created until 1923, but the estimates are reliable for this thought experiment.
Exxon Mobil
Although the performance chart of Exxon Mobil XOM stock above only goes back 20 years, Exxon Mobile has a long and illustrious history of epic wealth building. The company can trace its origins back to John D. Rockefeller’s Standard Oil empire and continues to be one of the world’s leading energy institutions.
Exxon Mobil currently enjoys a Zacks Rank #2 (Buy) rating, reflecting upward trending earnings revisions from analysts.
As mentioned earlier, XOM also has secular economic trends at its back, which should keep the stock bid for many years. Over the last decade, oil and gas infrastructure investments have been hampered significantly by two major factors, which will keep the supply of oil tight moving forwards.
Firstly, after a period of gross overinvestment following the commodity boom of the early 2000s, many oil and gas proprietors got severely burned. Forecasts of $200 oil had producers over extrapolating their present returns into the future, and the deluge of new projects dramatically increased supply.
It was then further exacerbated when the economy slowed and demand fell, putting further pressure on the price of oil and producer profits. Trillions of dollars of value in the industry burned up during this period, and the trauma of the period caused energy producers to severely limit new investments, and rather begin to hoard cash.
The second reason for underinvestment in new oil projects is the societal shift to exploring alternative sources of energy. Although an extremely important endeavor, it seems policy makers’ zeal for the undertaking has diverted investments for traditional energy into more speculative efforts in new sources of energy.
This has only intensified the lack of new oil supply coming to market, and though it will remain an issue for consumers as the price of oil will likely remain elevated in the coming years, it is a welcome development for Oil companies like Exxon Mobil.
In 2022, Exxon Mobil and other producers boasted some of the most profitable quarters in the company’s histories, fueled by higher oil prices caused in part by higher inflation as well as the Russia-Ukraine war.
Because the price of oil has fallen back to more reasonable levels, earnings have not surprisingly fallen this year, showing YoY decline. However, profits are still extremely high and are forecast to remain high.
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Even better, Exxon Mobil still has a very reasonable valuation. Today it is trading at a one year forward earnings multiple of 11.3x, which is below the market average, and below its 20-year median of 12.4x. Furthermore, XOM pays a handsome dividend yield of 3.6%, which it has raised by an average of 1.6% annually over the last five years.
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Alphabet
Google’s parent company Alphabet GOOGL, has been an incredible performing stock since IPO, compounding at 22% annually over the last 20 years. It has a totally unique business model, and owns 95% of the search market, while also sprouting new businesses like YouTube and Google cloud semi regularly.
Even as such a mature company, with a massive $1.5 trillion market cap, Alphabet continues to grow earnings at an enviable pace. EPS have more than doubled since just 2020 and are expected to grow at an annual rate of 15.4% annually over the next 3-5 years.
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Alphabet too trades at a very fair valuation. Currently it is trading at a one year forward earnings multiple of 21.7x, which is just above the market average, and below its 15-year median of 24.4x.
Also keeping a steady bid under Alphabet’s stock is its willingness to return cash to shareholders in the form of share buybacks. Management has reduced the shares outstanding by 10% in the last five years, and announced an additional $70 billion of buybacks in April 2023.
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Bottom Line
While sometimes the day-to-day news can be very loud and hard to ignore, most investors would benefit from zooming out their timeframe. The US stock market has an astonishing tendency to drift higher, and it’s something investors should never forget.
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