Part 5

Chevron (CVX)

Company Background

Chevron Corporation is an American multinational energy corporation, headquartered in San Ramon, California and founded in the early 20th century as an oil and gas giant, succeeding the energy behemoth Standard Oil. Chevron is engaged in every aspect of the oil and natural gas industries, including hydrocarbon exploration and production, refining, marketing and transport, chemicals manufacturing and sales, and power generation. Chevron is also one of the world’s largest companies, as of March 2020, it ranked fifteenth in the Fortune 500 with a yearly revenue of $146.5 billion and market valuation of $136 billion. The company is also the only energy component of the Dow Jones Industrial Average. Chevron generates around $95 billion in annual revenues and produces in excess of three million barrels per day of oil equivalent.

Chevron has spent the last decade in an attempt to reinvent its brand name and move away from the negative image that the Oil and Gas sector has acquired in recent years. Chevron now defines itself as “the human energy company” arguing that it’s only human for everyone to want a better life, and that we as a society need more reliable, affordable and ever-cleaner energy in order to fulfill our potential and that the company has the answer for all of that. Chevron also believes that one of the main reasons as to why the company is a leader in the energy space and will continue to lead the industry in the future is the social responsibility aspect of their business. The company focuses on not only delivering results but doing so with trust and integrity.

With the reopening of the economy and the fact that people are eager to start traveling and moving around again we see this inevitably leading to a strong increase in the demand for almost all Oil related products in the US in the coming weeks and months. In addition to that, the seasonal factors will also help push the Oil price higher as almost every year the commodity tends to outperform in the May-August period, mainly as a result of the summer-related vacations and traveling.

Current position – Financial Performance & Future Growth Prospects

Chevron’s current output has a 60/40 split between oil and natural gas. The company reported that at the end of last year(2020), it had approximately 11.1 billion barrels of oil-equivalent in stored reserves.

Despite the fact that the oil and gas industry has seriously fallen out of favor among investors globally on the back of environmental concerns and the widespread adoption of alternative renewable energy sources and systems, Chevron is still the 33-largest company in the S&P 500 Index and remains as a true energy behemoth. The company has a relatively low-risk business structure when it comes to the drilling, exploration and refining processes. In addition to that, despite all of the ups and downs in the Oil market, Chevron has maintained an excellent financial with stable and consistent cash flows. We believe that this shows that Chevron is well positioned to navigate the volatility in the oil and gas prices. The company recently boosted its dividend by 3.9%, which served as a signal to investors that the company feels confident in its future business prospects. With the very strong Balance Sheet that Chevron has, the dividend should remain safe going forward.

As you can understand being a traditional energy giant focused on drilling, refining and selling Oil and Natural Gas, is definitely not easy in an era where everyone is trying to go “green” and save the planet.

It is not uncommon for Chevron to be part of heated political, corporate and social debates, conversations and discussions over climate change policy. The company, however, has done a great job for blocking all of the “noise” and has continued to focus on its operational excellence, which has in turn improved its cash from operations. After all, we need to be objective when evaluating the global climate problem and understand that changes need to be made, but the fact of the matter is that the global economy simply CANNOT currently function without commodities like Oil & Gas. Most of the solar and wind alternatives do not have the capacity to completely replace the traditional energy sources.

Let us give you just few examples about the actual statistics behind some of the most popular renewable energy sources out there

  • 1 electric-car battery weighs 0.5 tonnes, but fabricating it takes over 250 tonnes of earth – digging, transporting and processing it somewhere around the world
  • Building a 100MW wind farm, which could power 75,000 homes takes over 30,000 tonnes of Iron Ore; 50,000 tonnes of concrete and 900 tonnes of non-recyclable plastic for the blades
  • Building a 100 MW solar farm, which could again power 75,000 homes takes 150% more in cement, steel and glass
  • The need of rare earth materials – Lithium, Cobalt, Copper, Iridium, Dysprosium. In order to meet these needs the world will have to see a 200-2,000% increase in the mining activities related to these minerals. This will create massive new mining operations in developing countries where pristine natural areas will be destroyed
  • The mining requires massive amounts of conventional energy (fossil fuels) and more energy intensive industrial processes needed for refining the materials and the build the solar or wind hardware
  • The waste problem – Solar and wind systems have a technical lifespan of around 20 years. By 2050 projections show that the amount of disposed solar panels (waste) will be twice as big as all of today’s plastic waste

  • It costs about the same to drill 1 oil well as it costs to build a giant wind turbine. However, while the wind turbine generates the energy equivalent of 1 barrel of Oil per hour, the Oil well generates 10 barrels per hour. Furthermore, it costs around $0.50 to store a barrel of oil or nat gas, while you need $200 worth of batteries in order to store the energy of 1 barrel of Oil.

Now, please understand us correctly – we care tremendously about our planed and want to see nature being preserved, protected and taken care of. However, our job as researchers is to look at all of the available statistics and reach objective conclusions based on the facts. Thus, the above-mentioned facts are given to you with one main goal and that’s to inform and educate you.

Chevron’s market cap stands at aroun $200 billion and the company splits its operations into two main categories: Upstream (exploration & production) and Downstream (refining). In 2020, the Upstream unit incurred a loss of $2.4 billion, as a result of the COVID-19 global pandemic, while the Downstream segment generated earnings of $47 million. Chevron’s other activities include transportation (pipelines, shipping) and chemicals (handled by Chevron Phillips Chemicals Company, a 50/50 joint venture with partner Phillips 66). Chevron’s current oil and gas development project pipeline is among the best in the industry – projected to grow its output by up to 3% this year. This production growth will primarily come from Chevron’s showpiece Permian Basin assets, where it has substantial holdings of 2.2 million net acres.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 14 months taking the price from the March 23rd lows of 2020 around $50 to the $110 52-week highs in the beginning of May, 2021. This represented an outstanding 120% gain for the stock in a little over a year. However, we need to remember that the Energy sector altogether was heavily beaten down during the pandemic and despite the 120% appreciation of the stock price, CVX is still trading just at its pre-COVID levels. The road to the current 52-week highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. The 2nd wave of the virus last Fall ended up pressuring again the Energy space heavily as all countries out there were following strict lock-down policies and no one was allowed to basically move. With the increased rapid vaccine development and distribution it seemed that we are slowly getting out of the woods and CVX bottomed at the end of October, 2020 at around $63 per share. There were few massive 15-20% corrective movements that took place during the strong uptrend that followed, but the uptrend remained intact on all occasions. The stock has regained its popularity as after all it remains one of the leaders in the Energy space. The way that Chevron has managed to evolve and re-brand itself from an Oil company into a multifaceted Energy company that cares about the environment and is socially responsible in everything that it does, has brought a lot of investors back into the stock.The stock is now a go-to choice for both small retail and large institutional investors looking to add some stable cyclical energy to their portfolios at a fair price.

We will start buying the stock at around $108, right above the first strong support at $103-105. If the price drops further in the short-term we would be buying more at the next support at $97. Our initial profit-taking target is set at $125, followed by the next target at $140 where we would be fully cashing in our profits.

The stock is currently sitting at $108 per share, which is just below its 52-week highs of $110 per share. We saw that the stock found a lot of buying interest around the $103-105 support zone, which was a very good sign for the bulls. The confluence of the horizontal, diagonal, 20 DMA, 50 DMA and 100 DMA dynamic support lines is currently spanned across the $100-106 area and is expected to continue to bring a lot of buyers back to the market every time the price drops there. The stock has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The stock has moved up with more than 20% since then, which really shows that there is a lot of momentum behind that move. Recently, the company reported strong Q1 financial performance results, surpassing the consensus estimates on both the top and bottom line.

The most recent consolidation between the $105-110 levels should be viewed by investors as a great opportunity to buy into one of the cyclical heavyweights at a discount and at a relatively fair P/E valuation. The recent failure of the price to break below the $103-104 support back in late May and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the coming weeks.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLE and XLE will be some of the best performing sector ETFs in June.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is going to benefit companies like Chevron tremendously, as the more heavy construction and transportation there is, the more oil is being used, which will be a great long term growth catalyst for the stock as well.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Despite the fact that, CVX hasn’t really managed to push above its pre-COVID highs up until now, we are strong believers in the future growth prospects of the stock and we are seeing the current $100-110 region as a great long-term accumulation zone for the stock.

Additionally, we are seeing CVX as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The most recent price corrections in the Energy sector should be treated as a great opportunity to buy into this strong performing part of the market at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are now moving higher again, thus signaling that the uptrend will most likely be continuing higher soon. In addition to that, it is important to note the fact that the XLE and the Energy sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Energy companies will be the primary beneficiaries of the reopening theme in the economy as the fact that people are eager to start traveling again, will inevitably lead to extremely high demand for Oil in the coming months. Additionally, the huge Infrastructure bill that will be passed in the coming months will also help all cyclical stocks as the broad economic activity will be heavily stimulated.

This makes us optimistic for the future performance of CVX as a meaningful part of the XLE ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of CVX with the large number of growth-related initiatives, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a relatively low discount of just 2% from the 52-week highs, we would like to point out that buying at these levels would be more suitable for risk-oriented investors while risk-averse investors should wait either for a clear break above the $110 resistance or a correction down towards the $103-104 before jumping in on the Long side. Thus, we are currently looking at the $103-106 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $125 and $140 respectively.

Raytheon Technologies (RTX)

Company Background

Raytheon Technologies Corporation is an American multinational aerospace and defence conglomerate headquartered in Waltham, Massachusetts. It is one of the largest aerospace, intelligence services providers and defense manufacturers in the world by revenue and market capitalization. Raytheon Technologies (RTX) researches, develops, and manufactures advanced technology products in the aerospace and defense industry, including aircraft engines, avionics, aerostructures, cybersecurity, missiles, air defense systems, and drones. The company is also a large military contractor, getting a significant portion of its revenue from the U.S. government.

Raytheon’s wide range of combat-proven defense products, has allowed it to continue to receive new orders from the Pentagon. This has really helped the aerospace and defense giant as its commercial business has taken a major hit, due to the COVID-19 impact, thus the strong growth in the military segment of the business has offset the weakness on the commercial side.

With the reopening of the economy and the fact that people are eager to start traveling and moving around again we see this inevitably leading to a strong increase in the commercial aspect of Raytheon’s business, which will definitely push the stock higher.

Current Position – Financial Performance & Future Growth Prospects

Raytheon Technologies has four main business categories that it generates its revenue from:

Collins Aerospace specializes in aerostructures, avionics, interiors, mechanical systems, mission systems, and power and control systems that serve customers across the commercial, regional, business aviation and military sectors. It generated revenues worth $19.29 billion in 2020, representing 32.9% of total revenues.

Pratt & Whitney designs, manufactures and services the world’s most advanced aircraft engines and auxiliary power systems for commercial, military and business aircraft. It generated revenues worth $16.80 billion 2020, representing 28.7% of total revenues.

Raytheon Intelligence & Space (RIS) delivers the disruptive technologies that customers need to succeed in any domain, against any challenge. A developer of advanced sensors, training, and cyber and software solutions, Raytheon Intelligence & Space provides a decisive advantage to civil, military and commercial customers in more than 40 countries around the world. It generated revenues worth $11.07 billion in 2020, representing 18.9% of total revenues.

Raytheon Missiles and Defense (RMB) produces a broad portfolio of advanced technologies, including air and missile defense systems, precision weapons, radars, and command and control systems – delivering end-to-end solutions to detect, track and engage threats. It generated revenues worth $11.40 billion in 2020, representing 19.5% of total revenues.

Following the company’s most recent merger activities where Raytheon completed an all-stock merger with United Technologies back in April 2020, the newly combined entity Raytheon Technologies is expected to benefit significantly from the technological upgrades and investments in which both Raytheon and United Technologies have been investing in for a long time. When two equally-sized companies merge it is of essential importance to find the right operational and business structure in order to create and extract greater efficiency and/or scale from the merger, or as it is usually referred to as creating the proper post-merger business synergy. In Q1, Raytheon Technologies achieved nearly $200 million of incremental merger synergies, bringing the total synergies of up to $440 million since the merger. Considering its high synergy efficiency, so far, and the growing business opportunities that the senior management foresees in the pipeline, the company increased its gross cost synergy target by $300 million from $1 billion to $1.3 billion.

Raytheon Technologies Q1, 2021 adjusted earnings per share (EPS) of 90 cents beat the consensus estimate of 86 cents by 4.6%. However, the bottom-line figure declined 32.3% YoY.

The company reported Q1 sales of $15,251 million, which was slightly below the consensus estimates of $15,355 million. The sales figure however increased 34.3% from $11,360 million recorded in the year-ago quarter.

Total costs and expenses increased 42.3% year over year to $14,346 million. The company generated operating profit of $1,013 million compared with $1.295 million in the year-ago quarter.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 8 months taking the price from the October 30thlows in 2020 around $51 to the $89 52-week highs in the beginning of June, 2021. This represented a very solid 74.5% gain for the stock in less than a year. However, we need to remember that the Industrial sector altogether was heavily beaten down during the pandemic and despite the 74.5% appreciation of the stock price, RTX still hasn’t managed to break its pre-COVID levels of around $90 per share. The road to the current 52-week highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. The 2nd wave of the virus last Fall ended up pressuring again the Industrial space heavily as all countries out there were following strict lock-down policies and no one was allowed to basically move. Factories were shut, production lines were stopped and supply chains were disrupted.

However, with the increased rapid vaccine development and distribution back at the end of the Fall last year it seemed that we are slowly getting out of the woods and RTX clearly bottomed at the end of October, 2020 at around $51 per share. There were few massive 15-20% corrective movements that took place during the strong uptrend that followed, but the uptrend remained intact on all occasions. The stock has regained its popularity as after all it remains one of the leaders in the Aerospace & Defense equipment industry. The way that Raytheon has evolved as a company through the huge merger with United Technologies while still keeping a stable financial position, has brought a lot of investors back into the stock. The stock is now a go-to choice for both small retail and large institutional investors looking to add some stable cyclical Industrial exposure to their portfolios at a fair price.

We will start buying the stock at around $85, right above the first strong support at $84. If the price drops further in the short-term we would be buying more at the next support at $80. Our initial profit-taking target is set at $105, followed by the next target at $115 where we would be fully cashing in our profits.

The stock is currently sitting at $88 per share, which is just below its 52-week highs of $90 per share. We saw that the stock has continued to find a lot of buying interest along the upward sloping 20 DMA, as it seems that the stock is in the process of accumulating a lot of bullish momentum, which will end up helping it to break above the resistance lying at $90. Such a break would be a very good sign for the bulls, as it would clear the path up towards the $105 and $115 marks. The confluence of the horizontal, diagonal, 20 DMA, 50 DMA and 100 DMA dynamic support lines is currently spanned across the $80-90 area, which is expected to continue to bring a lot of buyers back to the market every time the price drops there. The stock has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The stock has moved up with more than 35% since then, which really shows that there is a lot of momentum behind that uptrend. The company reported mixed Q1 financial performance results, surpassing the consensus estimates on the bottom line but slightly missed the top line forecast.

The most recent rejection from the $90 intermediate resistance, shows that there might be some profit taking ahead in the stock, after the remarkable push higher that we saw throughout the last few weeks.

However, the $84-86 range should be viewed by investors as a great opportunity to buy into one of the cyclical industrial leaders at a discount and at a relatively fair P/E valuation. The failure of the price to break below the $80 support back in May and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the next few months.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLI and XLE will be some of the best performing sector ETFs in June.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is going to benefit companies like Raytheon technologies tremendously, as the more money the government has to spend the better it is for a government contractor like Raytheon Technologies. Furthermore, with people going back to their normal lives we believe that Rayhteon will see a substantial pick up in its commercial but business, which will be a great long term growth catalyst for the stock as well.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that some of the Fundamental winners out there would indeed be the industrial and energy stocks. Despite the fact that, RTX has already appreciated with over 74% since last November, we are strong believers in the future growth prospects of the stock and we are seeing the $84-86 region as a great long-term accumulation zone for the stock.

Additionally, we are seeing RTX as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The expected short-term price corrections in RTX should be treated as a great opportunity to buy into this strong performing part of the market at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a RTX’s daily chart (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already started the process of retracing from their overbought conditions and are expected to start moving higher again in the coming weeks. In addition to that, it is important to note the fact that the XLI and the Industrial sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Industrial companies like Raytheon Technologies will be among the primary beneficiaries of both the reopening and government spending themes. Additionally, the huge Infrastructure bill that will be passed in the coming months will also help all cyclical stocks as the broad economic activity will be heavily stimulated.

This makes us optimistic for the future performance of RTX as a meaningful part of the XLI ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of RTX as a result of the huge merger with United Technologies, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a relatively low discount of just 2% from its 52-week highs, we would like to point out that buying at these levels would be more suitable for risk-oriented investors while risk-averse investors should wait either for a clear break above the $90 resistance or for a correction down towards the $84-86 region before jumping in on the Long side. Thus, we are currently looking at the $80-90 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $105 and $115 respectively.

Sincerely,

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