(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Chevron Corp.'s (CVX) stock has rebounded in recent months on global forecasts of surging oil prices. But the rally may end soon for the major oil producer. Its stock is on the verge of plunging more than 12 percent in the coming weeks from its current price of around $127.80 as of noon Tuesday, based on a technical analysis.
To be sure, Chevron's strong fundamentals seem to go against the bearish technical charts. This year, revenue will jump an estimated 23.8 percent while earnings soar 117 percent. But next year is a different story. Those big growth rates are expected to turn negative in 2019 and 2020, with both revenue and earnings forecast to decline.
Weak Technical Chart
So the technical charts may be picking up something that the fundamental numbers don't show. There are several bearish technical indicators. For starters, the technical chart shows that Chevron's stock has been trending lower since the start of 2018, and based on that trend shares could give back all of their gains since late February. Another bearish sign is the stock has been unable to recapture the highs seen at the beginning of May.
Chevron's relative strength index (RSI) is also weak. It's been moving lower since the beginning of 2018 and suggests that the stock is losing momentum. Finally, trading volume appears to be falling and may also indicate that the conviction of the buyers may be fading.
As indicated earlier, any Chevron investor has to look beyond the 2018 fiscal year. Revenue is seen dropping in 2019 by 1.6 percent to $172.62 billion, and fall again the following year. Additionally, earnings are expected to decline in 2019 by 2.2 percent and drop by nearly 3 percent in 2020.
It's worth noting that analysts have been raising their earnings estimates for 2019 since the start of the year. In fact, estimates in 2019 are up nearly 31 percent since the beginning of the year from approximately $6 per share. Meanwhile, revenue estimates are up 9.4 percent from $157.78 billion at the start of the year. They have come down a bit since the middle of May.
The most significant headwind for Chevron may be the price of oil. The price of West Texas Intermediate crude has fallen by about 9 percent since peaking on May 22 at an intraday high around $73.
Should oil prices continue to fall, it is likely to weigh on the stock and push it even lower. Given the flood of oil supply coming on the market as several major nations boost production, that scenario seems more likely than not.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.