CVX vs XOM: valuation, momentum, and which side the pairs trade favors

Investing.com reports that TD’s recommendation to rotate into Exxon Mobil (XOM) from Chevron (CVX) relies on momentum rather than a solid pairs trade strategy. The analysis highlights several key points to consider:

CVX is cheaper across all valuation metrics, with a notable +10.0% discount to intrinsic value compared to XOM’s minimal +2.3% premium. This significant fair value gap is a strong signal against the rotation recommendation.

The momentum case for XOM is compelling, as it has outperformed CVX by approximately 8.3 percentage points over the past year. However, the conventional pairs trade strategy would involve going long the laggard (CVX) and short the leader (XOM). This contradicts TD’s approach, which appears to be a short-term momentum trade rather than a mean reversion strategy.

A recent Aug 13 energy sector deep-dive supports the notion that CVX offers superior risk/reward with a 7.0% FCF yield and 12.8% fair value upside, presenting a compelling opportunity for income-focused investors. While the gap has narrowed, it has not closed entirely.

TD’s proposal to rotate into XOM may prove effective tactically if the market continues to favor defensive positions in a volatile oil price environment. Nonetheless, for a genuine pairs trade based on mean reversion, the data suggests maintaining a long CVX and short XOM stance. The substantial 10% fair value gap and 2.1% FCF yield spread argue for this position. Historical data is available for the past 10 years.