Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Chevron and Exxon Are Beating Big Tech Mid-2026
Transcript
- Lucas: If someone told you on January 1 that Chevron would be the second-best performer in the Dow by mid-July — up more than six percent in a single week — you probably would have laughed. But here we are. Luna: That six-point-two percent jump over the past five days is hard to ignore. Especially when the Nasdaq is down almost a percent over the same stretch. Lucas: Right. The S&P 500 is basically flat — seven thousand four hundred eighty-three as of this morning. The Dow is up a hair. But energy is the story. Exxon up three point six percent in a week. Chevron nearly double that. And it's not just a one-day blip. Luna: What's driving it? I know oil prices have firmed up, but is there something more structural? Lucas: There are two forces at play. First, the macro catalyst: the Strait of Hormuz. A headline yesterday from Kalshi traders suggests normal traffic won't resume until 2027 after the latest setback. That's a real supply-side constraint that keeps crude elevated. Second, and I think more interesting for stock pickers, is that these companies are generating enormous free cash flow at these prices. Luna: So it's not just a commodity trade — it's a cash-flow trade. That ties back to what we've been talking about on the show for weeks. Lucas: Exactly. We've done episodes on free cash flow yield, on moats, on operating leverage. Energy doesn't usually get a moat premium. But right now, Chevron and Exxon are yielding free cash flow in the high single digits — well above the S&P 500 average. And they're returning most of it via dividends and buybacks. Luna: I want to push back a little though. Energy is cyclical. When oil drops, those cash flows evaporate. How do you separate a sustainable pick from a trap? Lucas: Fair question. My framework starts with the balance sheet. Chevron has a debt to capital ratio around fifteen percent. Exxon is a bit higher, but both have investment-grade credit and decades of dividend growth. Then I look at breakeven costs. Chevron can generate positive free cash flow with oil in the mid-fifties. Today, crude is above eighty. That's a huge cushion. Luna: So even if prices slip, they're still printing cash. That's the argument for owning them as income generators — not as momentum bets. Lucas: Right. And the Fed minutes from the last meeting — released yesterday — reinforce the case. Officials were split on the direction of rates. Some wanted to hold, some wanted to cut. The uncertainty keeps long-term yields elevated, which hurts growth stocks with distant cash flows. Energy stocks with cash flows now? Those benefit from that same uncertainty. Luna: So the market is effectively rotating from long-duration tech to near-duration value. That shows up in the numbers — Apple up six and a half percent this week, but that's an exception. Most megacap tech is flat or down. Lucas: Apple is its own story — services margins, the cash machine we talked about in episode 102. But look at Meta, down one point six percent. Tesla, down seven point three percent. NVIDIA up three percent, but that's after a brutal June. The rotation is real. Luna: Let's talk about how a listener should approach an energy pick today. Walk me through your checklist. Lucas: Step one: track the free cash flow yield. For Chevron, it's around eight and a half percent. Step two: check the dividend growth trajectory. Chevron has raised its dividend for over thirty consecutive years. Step three: look at the cost structure. I want low breakeven and low debt. Step four: valuation. Chevron trades at about eleven times forward earnings. That's cheaper than the S&P 500's twenty-two times. Luna: But isn't that low multiple justified if earnings are cyclical? If oil crashes, those earnings disappear. Lucas: It's partly justified. But the market is pricing in a crash that hasn't happened. And even if oil falls to sixty-five, Chevron still earns a decent return on capital. The margin of safety is wider than people think. Luna: What about Exxon specifically? It's up six percent this week too, but its free cash flow yield is slightly lower, right? Lucas: Exxon yields around seven percent free cash flow — still good. But it has been spending more on acquisitions and new projects. I think Chevron is the cleaner play for a concentrated portfolio. Lower risk, higher dividend growth consistency. Luna: I want to mention something we've been hearing from listeners — a lot of people are asking whether they should just buy an energy ETF instead of picking individual names. Lucas: That's a great question. ETFs give you diversification, but they also give you the laggards. An energy ETF might hold a dozen names, some with weaker balance sheets. If you have the conviction, picking the two best-in-class — Chevron and maybe ConocoPhillips — can deliver better risk-adjusted returns. But you have to do the homework. Luna: And if you want to do that homework, our ad-free podcast helps you think through decisions like this. If it's added value, you can support the show at buy me a coffee dot com slash fexingo. Keeps us independent and ad-free. Lucas: Yeah, we don't run ads, so listener support is what keeps these conversations going. If our take on energy has been useful, that link is there. Luna: So back to the framework — you mentioned operating leverage earlier. How does that apply here? Lucas: Oil companies have high fixed costs and low variable costs. So when revenue rises — because oil prices go up — a disproportionate share flows to the bottom line. Chevron's operating margins expanded from about twelve percent in 2020 to over twenty percent last quarter. That's the leverage. Luna: But that cuts both ways on the way down. Margins compress just as fast. Lucas: Absolutely. That's why you need the low breakeven. If your cost per barrel is forty dollars and oil is eighty, you have a buffer. If oil drops to fifty, you still make money. It's the high-cost producers — the ones with breakevens above sixty — that get crushed in a downturn. Luna: And right now, Chevron and Exxon both have breakevens well below current prices. So they're insulated from a moderate pullback. Lucas: Exactly. That's the structural part. Now, there's also a tactical piece. The small-cap index, the Russell 2000, is down almost two percent this week. That tells me money is rotating into large-cap value — and energy is the largest value sector right now. Luna: So you're saying this isn't just a commodity spike. It's a portfolio construction decision. Lucas: Right. If you believe the Fed stays on hold or cuts slowly, value should continue to outperform growth. Energy is a direct beneficiary. And the free cash flow yield provides a floor that many tech stocks don't have. Luna: One risk I want to flag: political risk. The Biden administration has been critical of oil companies. Could windfall profit taxes or export restrictions change the math? Lucas: It's a real risk, but I think it's overstated. The US needs domestic production to keep prices stable. And Chevron and Exxon are both American companies with significant political lobbying power. A windfall tax would need congressional approval — unlikely in a divided government. Luna: What about the long-term thesis? If we're headed toward net zero, owning oil stocks for decades seems risky. Lucas: That's the elephant in the room. I don't think anyone should buy energy with a twenty-year horizon. But for a three-to-five-year hold, the cash flow generation is compelling. And these companies are investing in carbon capture and renewables. They're not dinosaurs — they're adapting. Luna: So for a concentrated portfolio, you'd recommend a slice of Chevron as a core holding right now? Lucas: I would. But only if you pair it with a strong understanding of the commodity cycle. Know your breakevens, watch the free cash flow, and be ready to trim if oil spikes above a hundred. The key is discipline. Luna: And that's really the theme of this show — doing the work to own a few high-conviction names instead of spreading yourself thin. Lucas: Exactly. Energy right now is rewarding that homework. Next week, I want to look at what the Fed minutes actually tell us about the committee's internal debate. There's a fascinating split between the hawks and doves that could shape the second half of 2026. Luna: I'll bring the data on rate expectations. For now, listeners, check out Chevron's investor presentation — the free cash flow breakdown is surprisingly transparent. Lucas: And as always, we'll keep digging into the numbers. See you next time.