Why Chevron Will Outperform the Dow on the Way Back Up

It was quite a stormy August and September, in fact one of the most volatile ever. Back in June we noted that a stagnant money supply as calculated by the Federal Reserve Money Stock Measures would be the primary factor in bringing down the Dow by September, if money supply did not start growing by then. It did start growing slowly again by late August, but by then it was too late and Black Monday 2015 had already happened.

But now, money supply is starting to grow at a much faster clip. Looking back at previous releases for this time period stretching out to the end of the year, the numbers typically keep growing. They do not tend to slow significantly until around mid-April. While this does not preclude further downside action, it does increase the chances that the worst is over for stocks.

The fly in the ointment, and a potentially serious one, is that new money in the system does not necessarily have to go into stocks. It could go into commodities instead, especially if some global geopolitical event like a Syrian conflagration between the United States and Russia were to disturb global equity markets. These types of events tend to send commodities much higher, but stocks tend to sell off.

ALSO READ: 5 Oversold Chinese Companies Worth a Look

So given increasing money supply, which in a worst case scenario will be diverted from stocks to commodities, Chevron is a win-win. Not only is it a good way to hedge against the worst case of some geopolitical disturbance, but its investors could still benefit from rising stocks even if everything remains smooth sailing and nothing happens in the Middle East.

Giving Chevron an added boost is its high dividend at current prices. Chevron pays a generous $4.28 per share, yielding 5% at present, which also makes it an attractive dividend play. While the stock is already 25% above its Black Monday lows, it is still a much larger 35% off its highs. Expecting it to find those highs soon may be overly optimistic for now, but top to bottom the stock was cut almost in half, not unusual for a cyclical bear in commodity-based equities. Chevron is already handily outperforming the Dow since the August 24 bottom, and that trend can continue.

A third factor that could give Chevron an extra edge is that October is set to be crucial for smaller indebted energy firms as they attempt to renew their credit lines. It is likely that many will go bankrupt, allowing bigger companies like Chevron to pick up resources at a discount with less competition going forward.

ALSO READ: 3 Deutsche Bank Oil Services Stock Picks With Over 100% Upside Potential