One of the richest self-made men I've ever met once told me "I may lose opportunity, I try to not lose money".
That's my attitude on BP stock.
First up, ValueWalk:
In the past month the share price of British Petroleum’s stock (Ticker:BP) has taken a massive beating. The stock is down 35% in the past month. In the past five days alone the stock is down 20%.From The Big Picture:
The question is, is the stock overvalued or undervalued? There are good arguments on both sides, but I think this is a classic case of investor overreaction, and the stock is a good buy.
James Altucher wrote a column in the Wall Street Journal recently examining the question of British Petroleum’s potential liabilities due to the recent oil spill. He believes in a worst case scenario the company would be liable up to $40 billion. In addition, there are several unknown factors that could weigh negatively on BP. What action will the Government take to curtail offshore drilling? BP’s reputation has been severly damaged, will this hurt future profitability? Both these questions cannot be quantitatively measured, and only time will tell the answer.
Some people are far even more pessimistic than Altucher. There are uncertainties as to how high the liabilities of BP will truly reach. A recent news report stated that BP may be forced to declare bankruptcy.
Despite these uncertainties there is a strong bullish case to be made. It seems investors are assuming the worst- that BP will be on the hook for tens of billions of dollars. Even, if this happens BP should be a safe investment, since BP is a cash machine. BP had $7 in free cash flow last quarter. BP’s cash flow from operations in 2009 was $28 billion. The company also has $8 billion of cash on it’s balance sheet, and total current assets are close to $70 billion....MORE
The single most common emailed question I’ve gotten — from readers, from clients, from the media — is “Do you buy BP? If so, when, where and how?”
Before we proceed, please understand what my thought process is: I want us to consider, weigh and try to determine what the possible risks are versus the potential reward is in this stock.
I suggest those of you who are considering buying or selling BP think about the following ten issues:
1) BP’s Stock is in Freefall: As the nearby chart shows, BP is down more than 50% from recent highs. Its 200 day moving average is up ~45% from current prices — near ~55. (click for larger chart)
The current market cap is about $100B, almost 40% below its Enterprise Value of $141.65B.
When making a trade in a stock like this, you want to do more than merely hope for a binary outcome – i.e., Make money or Lose money. The goal is to understand what the risks and rewards are, predetermine the losses/downside, and put ion the best risk/reward you can.
There is intelligent speculation and outright gambling. If this trade fits your profile, aim to do the former and avoid the latter.
Research project: In distressed companies, at what levels have we seen ideal entries — in terms of price off of highs, below enterprise value, percentages below 50 and 200 day MA, dividend yields, and P/E ?
2) Is this a Trade, or an Investment? : There are different rules for Trading than Investing. Before you step into a name in distress, be sure to understand exactly what your goals are, your risk tolerances, and your time horizon.
My guess is the vast majority of the huge volume spike in BP are stat arbitrage (between the common stock and bonds, there are apparently no convertibles) and a mix of day traders and hedgies. If you plan on making BP a long term investment, then you should be thinking in terms of a longer holding period — years, not months.
A universal rule: Never allow a trade to become an investment.
3) Beware the Value Trap: There can be no doubt that BP, at a 5 P/E and 10%+ dividend yield looks cheap. The question is, how much cheaper might it get? Cheap stocks can and do get cheaper, just as dear stocks can (and do) get pricier.
Indeed, the early investors in the door after BP first fell — and quite a few people publicly announced their buys at 45, 40 and 35 — are now enormously underwater.
Suggestion: Investors should not try to bottom tick the stock. Plan on scaling the initial investment in over days or weeks.
Rather than catch the falling knife, plan on adding a good chunk of the position after the stock breaks the 20 and 50 day moving averages to the upside. That way, you are averaging UP rather than DOWN...MORE