Exxon Proves Raw Stuff Is the Right Stuff

Its ascent to hugest means suppliers have trumped makers.
By Jon Markman ,

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The ascent last month of

ExxonMobil

(XOM) - Get Report

to the top spot among all U.S. companies in terms of market value was a historic moment of real consequence.

It signaled more than the triumph of the strategy of a single company. It signaled the dawn of an era in which suppliers matter more than manufacturers, and an era in which the fuel used to create things has become more valuable than the things themselves.

Looking back at this moment with the benefit of hindsight 10 years from now, we might also say that Exxon's ascent signaled the rise of developing overdeveloped nations -- a time when the value of scarce raw materials scoured from the earth paradoxically began to trump the value of plentiful finished goods increasingly covering the earth.

Exxon's market capitalization, which topped $402 billion through Feb. 28, has blown past former top-spot holders

General Electric

(GE) - Get Report

and

Microsoft

(MSFT) - Get Report

in recent weeks as if they were standing still. And in some ways, unfortunately, they are.

GE and Microsoft: Standing Still

GE, priced by investors at $374 billion, grew to hold the top spot for a long time in the mid-1990s, as well as the past couple of years, on the basis of its strategy to acquire financial-services businesses and create high-value electronic, aerospace and medical-device products. The company's diverse base of operations was intended to provide rock-solid shareholder value in good times and bad. But at a time of slow global economic growth and extreme competition on price from Chinese rivals, GE has failed to meet the challenge of achieving anything close to historic levels.

Microsoft, at a market capitalization today of $274 billion, took over the top spot in the late 1990s from General Electric on the basis of its strategy to establish a stranglehold on the world's ability to use computers efficiently through a common operating system. It then leveraged that power by creating cheap, standard software for tasks ranging from word processing to Web services. Yet increasing competition from smaller and more nimble rivals has made it nearly impossible for Microsoft, too, to grow at anything close to its former rate of high double digits. It has languished at the same market value for the past seven years, unable to find a path to new heights despite vast improvements in the strength, importance and range of its products.

Networking-equipment maker

Cisco Systems

(CSCO) - Get Report

, which briefly took over the top spot in 2000, has declined 75% from its peak market capitalization, to a current level of $113 billion, as perceptions of the value of connecting businesses and people with wires diminished in relation to the value of connecting oil with trucks. Over the period of its decline, the stock values of trucker

Yellow Roadway

(YELL)

and oil explorer

Anadarko Petroleum

(APC) - Get Report

have advanced by 232% and 126%, respectively.

Coca-Cola: KO'd by Apache

Several other onetime pretenders to the market-cap throne have also found it impossible to grow much in a non-inflationary world. Global beverage titan

Coca-Cola

(KO) - Get Report

has seen its share price stagnate for nine years as the world's taste for fizzy, brown sugar water has been nothing next to its appetite for light, sweet crude oil. Since 1997, the value of Coca-Cola is down 10%, while the value of large-cap driller

Apache

(APA) - Get Report

has risen 450%.

The same can certainly be said for the divergence in the value of oil and drugs. Since 1999, when

Pfizer

(PFE) - Get Report

was near the height of its popularity over a strategy to grow by buying and developing portfolios of expensive, hard-to-produce drugs, it has been badly eclipsed by

ConocoPhillips

(COP) - Get Report

, a company that simply pumps the modern world's leading drug out of the ground. Pfizer shares are down 18% since the end of 1999, while Conoco shares are up 132%.

And how about insurance, the business of guaranteeing protection from the world's risks?

American International Group

(AIG) - Get Report

once neared the top of the capitalization lists as a result of its multipronged strategy to advance from its roots in Asia into pension benefits and all manner of complicated financial services in the U.S. and Europe. But its high-powered ambitions, too, have looked anemic next to, say,

Occidental Petroleum

(OXY) - Get Report

, which just discovers and transfers oil from dusty places such as Bakersfield, Calif., and coastal Ecuador and Qatar. Occidental shares are up 221% since the end of 1999 vs. AIG's decline of 7%.

The Raw Power of Energy

These examples simply illustrate the unexpected development that the raw value of energy -- whether in the form of petroleum, natural gas or synthetic chemicals -- has triumphed over all the things that energy has empowered. And the victory lap now being taken by integrated oil giant ExxonMobil is symbolic of all the work done by its smaller but fast-growing teammates.

Now, as an investor, it is fair to wonder if this newfound attention to energy signals nothing so much as the end of the trend. But I would bet that the advance is far from done, even as crude oil nears its historic high of $56 per barrel this week. For even though half of the top-gaining 25 stocks in the

S&P 500

this year hail from the energy sector, they still represent just a tiny fraction of that market proxy -- and of most investors' portfolios.

Consider that the

Dow Jones Industrial Average

, supposedly representative of the entire U.S. economy, currently has just a single energy stock: Exxon. In contrast, it has three health care stocks, three retailers, four tech stocks and two phone utilities -- all finished-goods makers and providers that cannot hold a candle to the value creation going on today in the energy business.

Triumph of the Energy Bulls?

It's fascinating to note, in this regard, that the managers of the DJIA kicked

ChevronTexaco

(CVX) - Get Report

out of their club on Oct. 31, 1999, in deference to the entry of

Intel

(INTC) - Get Report

. Chevron would rise in value by 33% over the next five years while Intel would fall in value by 37%. At the time, editorial writers and portfolio managers praised the decision as a smart modernization of the index, while in fact it turned out that there would never be a modern world without the magic elixir of oil and gas.

In summary, the summiting of ExxonMobil atop the pile might well be seen as just the first bright flag of the energy bulls on a planet that continues to deny their achievement. As the developing economies of India and China need more oil and gas to power their industrial ambitions, the earth is apparently giving it up more and more grudgingly. When voracious demand chases slim supply, the result is seldom in doubt.

Don't look for a top until at least Dow Jones puts another energy stock in the Dow and Standard & Poor's puts at least a couple more energy companies in its own large-cap standard bearer, the S&P 500. At the top of the

Nasdaq

bubble, don't forget, S&P put a dozen tech stocks in that index to gun the representation of that sector north of 25%. Since energy is still less than 10% of market capitalization in the index, it has a long way to go.

Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at

jon.markman@thestreet.com.

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