For growth investors like myself, there’s no way to sugarcoat it: This quarter has been a disaster. With the S&P 500 and NASDAQ Composite down 12.4% and 19.6% in the quarter as of March 14, the market as a whole is struggling. However, there are plenty of stocks that have had great quarters.
Three stocks leading the market this quarter are Chevron ( CVX 1.80% ), Occidental Petroleum ( OXY 8.39% ), and Mosaic ( MOS 8.25% ). All three companies have benefited from recent market trends (like rising oil prices) and geopolitical events.
Should these tailwinds continue, this trio could have an even better year. Will they continue their dominance?
The second-largest U.S. oil and gas company, Chevron is a major player, with a market cap of $325 billion, only $20 billion behind first-place ExxonMobil. Unlike some players, Chevron plays on both sides of the industry, with an exploration and production business while also refining crude oil. With West Texas Intermediate crude rising from $75.33 a barrel at the beginning of the quarter to $101.32 as of March 14, Chevron has seen its primary commodity input rise 35% during the quarter. This rise nearly mirrors Chevron’s 42% gain in the same period.
Clearly, Chevron has benefited from rising prices, as its price to produce a barrel of oil hasn’t been affected as much as the base oil price. Additionally, Chevron recently reported a solid 2021, with a record free cash flow of $21.1 billion. Chevron had a difficult 2020, with demand for oil falling off a cliff amid the pandemic lockdowns. Still, the company looks like it weathered the storm and is as dominant as ever.
However, many are skeptical of the role fossil fuels will play in the future. While the long-term trend is to shift away from these resources, it is impossible for the U.S. to flip the switch to green energy immediately. Chevron recognizes this and is enacting its lower carbon future initiative. While it isn’t going out of its way to adopt green sources of energy, it is lowering its carbon footprint and expanding its lower carbon business.
I have no idea how the oil market will act over the next months or years. However, I do know the demand isn’t going away and Chevron is a market leader. The stock pays an attractive 3.3% dividend and only trades at a 20.5 price-to-earnings (P/E) ratio. Depending on your view of how quickly green energy will be adopted, this could be an attractive stock even as it trades near all-time highs.
2. Occidental Petroleum
Much like Chevron, Occidental Petroleum explores and drills for oil. However, it does not have a refinery business. It is the fourth-largest petroleum producer in the Gulf of Mexico and has been drilling in the area since 1947. It also has several other operations around North America
Occidental’s carbon strategy is much more robust than Chevron’s. It is committed to achieving net-zero emissions by developing techniques to capture CO2 emissions and then make products with the compound. Occidental recognizes petroleum will be vital for years to come, so it is taking steps to reduce its environmental impact. The plan is to have net-zero in-house operations by 2040 and achieve net-zero by 2050 for all products it creates.
For 2021, the company brought in $8.8 billion in free cash flow, which Occidental used to pay down its massive $29 billion debt. This is a major goal for the company, but the speed it reduces its debt will be impacted by oil prices.
Occidental’s business is driven by a factor it cannot control: petroleum demand. While the stock is up an incredible 92% during the quarter as of March 14, it could easily give up those gains should oil prices crash.
Unlike the other two companies, Mosaic focuses on mining potash and phosphate — two of the three main ingredients in fertilizer. Without fertilizer, Mosaic claims the world’s crop yield would be cut in half. All of Mosaic’s mines are in the Americas, something working to the company’s advantage in the current environment.
Russia and Belarus produced 14.9 million metric tons of potash during 2020, or about 35% of the world’s supply. As a part of sanction packages, many countries in the world will not be purchasing their potash, which will result in a price spike because non-Russian or Belarusian potash will be in higher demand. While this is good news for Mosaic, it is bad news for consumers, as higher fertilizer ingredient prices will lead to higher food prices.
Mosaic’s stock price has reacted accordingly and is up 48% in the quarter. In February it reported 2021 revenue growth of 42% revenue to $12.4 billion. Its gross margin widened to 26% from 12% in 2020, showing huge improvement mainly due to higher potash and phosphate prices.
Mosaic also announced a $1 billion stock buyback once its current program is complete. This would lead to a repurchase of about 5% of the shares outstanding — a huge amount. Mosaic is subject to the vagaries of the commodities market, which can be treacherous. The stock is still well off its all-time high set in 2008 and is just now seeing success after years of being dormant.
Although I am certain the world will be using petroleum products for decades to come, I’m uncertain of the market’s appetite for oil and gas companies. However, the world will always need to eat, and fertilizer plays a vital part in food production. Still, Mosaic is in a volatile industry, and if sanctions are lifted because of a truce, fertilizer prices will drop due to an increase in supply.
These three stocks are leading the market this quarter and may do so in the next, but over the next three to five years I doubt any of these companies will still be leading the market. All it takes is peace in Ukraine and these stocks will take a hit.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.