Friday, June 25, 2010

BP plc (British Pete) is getting cheap

Back in late May I got a call from a local portfolio manager (Bob) asking for a technical opinion on BP PLC whose share price had torpedoed in reaction to the companies' Deepwater Horizon Gulf oil spill. "Look Bill, at $41 the shares are cheap when you take into account the earnings multiple, the yield and the book value."

Bob's analysis is typical fundamental stuff that reasons falling stocks are a better buy than rising stocks because a falling stock is "cheaper" than a rising stock which is getting "expensive." I advised against the purchase because the stock was falling faster relative to its industry peers Chevron Corporation and Exxon Mobil Corporation. I told Bob the market is clearly worried about the Gulf oil spill and that in many cases stocks will fall ahead of changes in the fundamentals which can lag the current reality.

To-day with BP trading in the 27 dollar range I have no interest in the stock because the Gulf oil spill is a crisis that may take generations to repair and the potential liabilities could wipe out the company - I think the stock could go to zero.

Now most technical analysts believe that for every negative event - there is an offsetting positive event somewhere else. So as investors we need to protect our portfolios by avoiding industries and sectors negatively impacted by the Gulf Crisis and to seek out the beneficiaries.

This is where I invite your opinion. I need to see the investing landscape ahead for the next 6 to 10 months. How will this crisis impact the U.S. economy, interest rates, food prices, energy prices, precious metals and base metals? What stock sectors will be impacted be it financial, consumer, technology, energy, materials, health care, utilities and industrials? Will we bet on inflation or deflation? Small caps or big caps? Is this bigger than the Greek crisis? Bigger than the 2007 - 2008 housing crisis? What about the transportation sector - how do we value the railroads? What about tourism and travel? Investing is not a spectator sport - what to do - your input please.


Anonymous said...

Obama will endorse alternative energy sources -- one big one being natural gas -- and legislating restrictions on deep water drilling

Anonymous said...

1. oil spill is local, but energy might bounce up until drilling is clarified. Maybe that is why Western land sales were so strong, and drilling stocks are some stronger.
2. BRIC are still growing and using commodities. Does that put a floor on metals and softs?
3. The money will still lead, but Dr. Rosenberg may be more in vogue for a while, so be alert to deflation-is there any outside N.America?

Anonymous said...

obama and the rest of the world will approve stimulus part deux in the fall 2010

Anonymous said...

I've put my money where my mouth is, bought some out of the money LEAP calls (Jan 2012). Call it a contrarian play or whatever you like. I believe BP is not going bankrupt. If BP goes bankrupt -- the UK will be headed for a depression due to the amt of pension funds invested in the company. IF BP cannot pay for the cleanup which according to their financial statements they should have no problem see:

the UK will assist to keep this oil juggernaut alive. said...

Hello All

We think Anonymous has made a gutsy call here – but now we wonder if there could be other option strategies to play the BP fiasco. There are only 3-ways for BP to trade – up, down or sideways – we just are not sure when the event will occur so should we do stuff like covered calls or puts, straddles or a butterfly? We will put this to our option guy to-day and get back in a few hours.