Who’s really worse, BP plc (BP) or Goldman Sachs (GS)? Consumers have plenty of reasons to be down on both companies right now. Energy giant BP is up to its elbows in oil as a deepwater well on the ocean floor continues to spew oil over a month after the initial failure, and Goldman is currently under investigation for allegedly peddling investments while at the same time profiting from those investments’ failures.
But some traders can’t help but wonder whether the problems are overblown and one or both of these stocks are actually the bargain buy of the year right now. So what’s the deal? Are these stocks really bad for investors, or are they just a victim of bad press?
First, let’s look at how far they’ve fallen. BP stock is down 27% year-to-date and is trading at a P/E ratio of less than 7, with shares just two dollars away from a 52-week low. GS stock has seen a more recent but equally severe meltdown, with shares off over 20% from their peak in mid-April. Goldman Sachs P/E valuation is less than 6, and another 6% to 7% decline will send shares to a new 52-week low.
Under normal conditions, investors would leap for a share of these blue chips at those valuations. However, these are not normal conditions. Bad press continues to hold back shares and neither company have appeared to hit much of a floor just yet. While both GS and BP stocks have rebounded slightly in the past few days (including so far in trading this morning), their overall trend is clearly downward.
But it’s worth noting that recent hangups aside, both stocks were clearly on the way up in 2010.
BP has posted strong earnings growth in recent quarters and topped expectations in three out of the last four reports by an average of over 19%. In April, the crude oil company boasted its first-quarter profit more than doubled from a year earlier to $6.1 billion due to higher selling prices and lower production costs and taxes. Earnings were also up an impressive 42% over the previous quarter.
Goldman Sachs took a lot of heat reporting record 2009 full-year profits of over $13 billion, and criticism only increased as GS posted a blowout first-quarter report just days after fraud allegations arose. Specifically, Goldman’s net income nearly doubled in the first quarter to $3.29 billion, bolstered by strength in fixed income trading and principal investments. The earnings of $5.59 a share easily beat analysts’ average forecast of $4.01.
Those past numbers show strong growth for both companies, and current valuations indicate BP and GS stock could be good buys if these earnings trends continue.
But that is one heck of an “if.”
If criminal charges are levied against either company — either BP for conspiring to put profits ahead of environmental safety or Goldman for willingly defrauding investors — then things could go from bad to worse for these stocks. And since BP is footing the bill for much of the oil cleanup and will supposedly pay restitution to Gulf Coast communities and businesses, every day that the oil continues to flow means even bigger losses.
If you’re looking at the lesser of these two evils, gutsy investors would probably be better off jumping into Goldman Sachs. If the Bear Stearns fraud case in 2009 is any example, prosecutors have trouble hanging substantive charges on investment banks. And besides, as of this writing the fraud allegations are not criminal. Goldman has a history of strong earnings growth even in difficult markets. Barring the revelation of another scandal, GS should be able to muddle through.
BP could be the buy of the century right now if the company caps off the oil leak tomorrow. But on the other hand, if attempts continue to fail the stock is only going to be less and less attractive as cleanup costs and lawsuits mount and as political ire reach a fever pitch. Unlike the Goldman scandal which is based on charges of previous wrongdoing, the real impact of the BP oil disaster continues to wash up on Gulf Coast beaches every day.
Perhaps the only real thing going in BP’s favor right now is that it at least has partners in this debacle — Transocean (RIG) was the offshore drilling contractor ; the mud sub-contractor was a joint venture between Smith International, Inc. ( SII) and Schlumberger Ltd. (SLB) which are in the process of merging; the casing sub-contractor was Weatherford International, Ltd. WFT); and the cementing sub-contractor was Halliburton Co. ( HAL). The extent to which these other stocks will shoulder the costs associated with the disaster, however, remains to be seen.
To be sure, both of these investments would be high-risk plays and investors need to realize this. But looking at the facts and public opinions, it appears GS is the lesser of the two evils.
Full disclosure: As of this writing, Jeff Reeves owned a long position in Goldman Sachs stock.
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All five of these companies have explosive growth potential, rock-bottom valuations and are priced under $10 per share. PLUS, they’re set to double even if the market plunges — Get their names here!