the shell-Aktie (WKN: A3C99G) is currently trading at a trading level of around €23. Cheap expensive? Depending on the perspective you choose. In any case, since the bottom in the krona collapse and the oil price glut, stocks have traded significantly higher. However, we have yet to see record levels of over EUR30 per share yet.
But should you buy Shell shares now? Valuation, market outlook and other factors, such as the portfolio itself, play a role. Let’s take a look at today’s opportunity. As well as the risk that the wind in the oil market could of course change direction again.
Shell shares: A purchase under these premises
In principle, we can say that Shell stock is cheap. In fiscal 2022, with Brent and WTI trading above $100, there is a reasonable chance that the price-earnings ratio will be even lower than 10. The key question is: How long will the valuation indices remain? thus? If there were at least oil prices above $80 in the medium term for the next several years, there is an opportunity for strong returns.
A dividend of around 4% with an upward trend promises strong return potential. Ultimately, though, it’s the combination of growing or stable earnings and strong free cash flow that can propel stocks to new heights. In any case, with a P/E ratio of 10, Shell stock is not too expensive in a more stable market environment.
There is also an opportunity for management to invest in a more sustainable business model. That’s part of an even more crucial investment thesis. Investing in electricity or renewable energy can reduce dependence on oil and natural gas. High free cash inflows give us the opportunity to tackle this process more quickly.
So there are quite a few potential catalysts for Shell stock. First, the cheap valuation and a market environment with a large margin of safety. The fact that oil prices have risen more sharply than Brent and WTI prices also reveals that there is still strong potential for recovery.
But also for me: No important position
Shell shares have a chance. But also the risks that the oil market is always very, very cyclical. Therefore, I would only invest as a mix in a more diversified portfolio. The fact that Warren Buffett has increased his exposure to the oil market may at least be an indicator that market conditions will remain somewhat more extreme in the medium term.
Some hedging against this level of oil prices and in times of inflation is possible with oil stocks. But I wouldn’t depend on fossil fuel or any conglomerate in this space for a significant part of my long-term wealth.
The article Is it smart to buy Shell shares now? first appeared in The Motley Fool Germany.
Vincent owns Shell shares. The Motley Fool does not own any of the shares mentioned.
Motley Fool Germany 2022