Sell ExxonMobil (NYSE: XOM).

That’s what I told my dad yesterday, as we enjoyed a beer after a busy day of skiing in the mountains of Vermont.

Selling Exxon is a touchy subject in the Wyatt family. That’s because my grandparents gifted their children and grandchildren with shares of the oil giant. As a result, it’s a sentimental investment that my parents still own. In fact, it’s the single biggest stock in their portfolio.

I don’t have anything against Exxon. It was the first stock I owned. It’s a superb company with a long history of rewarding shareholders.  Yet the current situation with Exxon is troubling . . . and it points toward a surprising development among a select group of dividend stocks.

In my 25 years of investing, I can never recall a similar situation. If you own ExxonMobil or similar stocks, I want to share an important warning today . . .

When Earnings Fall…

You know that earnings are the most widely watched metric for public companies. Of course, there are dozens of other important metrics as well. But at the end of the day, the income that hits the bottom line is what matters most. And it’s what analysts and investors monitor most closely.

Most investors like owning companies that are growing their earnings. The reason is simple: bigger earnings in future years will make their investment more valuable. For this same reason, investors despise companies that report shrinking earnings.

As a result, when a company’s earnings fall dramatically, the stock price typically crashes. Even huge companies like Cisco or Microsoft can see their shares plunge 10% in a day after EPS miss estimates by a penny.

Earnings results obviously move stock prices, and so do earnings estimates. That’s because Wall Street analysts are regularly updating their financial models for companies. When these estimates of future earnings drop, that typically results in “sell alerts” and a decline in the share price.

Why Haven’t Energy Stocks Fallen More?

I’ve been closely watching energy stocks. Specifically, I’ve been looking at the fully integrated energy exploration and production companies. These companies are widely owned by dividend investors, who love their healthy and growing dividends.

With the price of crude oil plunging 50% to a current $49 per barrel, some value investors are stepping into the energy sector. After spending much of the last month digging into energy stocks, I’ve decided to remain on the sidelines. Let me explain why…

The fourth-quarter earnings reports from big oil companies weren’t good. BP (NYSE: BP), Chevron (NYSE: CVX), and ExxonMobil (NYSE: XOM) all reported smaller profits.

Profits at Chevron and ExxonMobil plunged 30% and 21%, respectively. Meanwhile, BP reported a net loss of $4.4 billion versus a profit of $1 billion one year ago. These results show the immediate impact of low oil prices on these businesses.

However, my biggest concern is that earnings estimates for energy stocks are plummeting. Specifically, 2015 EPS estimates for BP, Chevron, and ExxonMobil have dropped an average of 51% in the last 90 days.

Big Oil Earnings Estimates: 2015

Company 1/23/15 90 Days Ago Decline
BP $2.08 $4.08 49.0%
Chevron $3.88 $9.56 59.4%
ExxonMobil $3.68 $6.79 45.8%

Given the rapidly declining earnings outlook, I would expect the share prices to decline rapidly. But that hasn’t been the case. Instead, the shares of these three big oil companies have posted modest pullbacks. In fact, the average decline over the last 90 days is just 9%.

When I look at 2016 EPS estimates, the outlook is far brighter. Wall Street analysts expect these big three oil stocks to grow EPS by an average of 59.6% from 2015 to 2016.

What’s behind the optimistic growth outlook for 2016? Before you get excited, take a look at the big picture. Analysts have slashed their outlook for 2016 EPS by 31%. Yet with 2016 EPS estimates remaining far above 2015, it means only one thing: higher oil prices are a key component to these upbeat estimates.

Big Oil Earnings Estimates: 2016

Company 1/23/15 90 Days Ago Decline
BP $3.32 $4.45 25.4%
Chevron $6.77 $11.10 39.0%
ExxonMobil $5.32 $7.46 28.7%

 I don’t have a clue about where crude oil prices are heading. I wasn’t ringing the alarm and telling you to sell oil stocks in in June. I didn’t expect oil to fall from $100 to $50 per barrel. And I haven’t a clue where it’s headed from here.

Nobody predicted a 50% drop for oil prices.

That’s exactly why I think it makes sense to stay away from big oil stocks. Oil could continue trading at $45 – $60 per barrel. It could fall to the $30s, or rise to the $70s.  Your guess is as good as mine…but it’s nothing more than a guess.

With lots of uncertainty, you might expect big oil stocks to be cheap. But based on the most conventional valuation metric – the price-to-earnings ratio (P/E) – these stocks are expensive. Consider the 2015 P/E multiples for the big three oil stocks: 20x earnings for BP, 28x earnings for Chevron, and 24x earnings for ExxonMobil.

Bet on Valuations?

The only way to find reasonable valuations for these stocks is to look forward to 2016. But those earnings estimates are largely dependent upon West Texas Intermediate (WTI) crude oil bouncing back to roughly $75 per barrel.

That’s not a bet I’m prepared to make today. I think it’s likely that crude oil prices will remain depressed throughout 2015. Even if you think crude will quickly bounce back, this is already priced into big oil stocks. Therefore, when crude prices rise, don’t expect a big uptick for these oil stocks.

As a value investor, I’m often tempted to buy out-of-favor sectors. Today, the energy sector is out of favor. Some energy stocks have crashed along with the price of oil. But that hasn’t been the case for the huge fully integrated oil stocks.

I’ll be ready to jump into big oil stocks when their valuations are attractive. But buying Exxon at a huge premium to the S&P 500 doesn’t make a ton of sense to me.

These stocks have held up well due to their healthy dividend. With yields from bonds and Treasurys so low, income investors want to own these big oil stocks. Collecting a 3% dividend from Exxon or a 5.7% yield from BP is attractive.

Perhaps crude prices will bounce back in 2016. But the market shows that a rebound for oil prices is already baked in to their future earnings.  And that will limit the upside for these stocks.

Saudi Arabia’s Plot Backfires! 

When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.

Click here for all the details.

Published by Wyatt Investment Research at