by Hilary Kramer | June 18, 2010 6:30 am
The BP Plc (NYSE: BP[1]) oil spill in the Gulf of Mexico is horrific. But investors looking for stocks to buy should consider simple trading strategies[2] like picking up a good stock at the bottom — such as BP stock . Buying an undervalued stock can easily make you a quick profit. There is risk, of course, but buying BP stock could offer retirement investors significant rewards. If you want to make money, sometimes you have to be willing to keep a cool head about you and go against the herd.
When investors were liquidating their portfolios and running for the bomb shelter in spring of 2009, the savvy traders were buying. And when everyone and their brother were buying tech stocks at the height of the dot-com bubble, the savvy traders were locking in their profits.
As I’ve learned in my years as a Wall Street analyst and money manager, sometimes it pays to swim against the current. And I’m going to make a contrarian recommendation right now that others may call crazy: Buy BP. Here’s the simple reason: BP is trading at around $32 right now and the stock is priced as if it’s going out of business. And that probably isn’t going to happen.
As I watched President Obama’s Oval Office speech this week, and saw him meeting with BP leadership Wednesday, it struck me that the biggest price BP is paying is in political and public relations costs. For instance, the $20 billion set aside in escrow to pay compensation to Gulf Coast businesses is only about two-thirds of the company’s free cash flow for the quarter.
These guys are just not another Bear Stearns or Lehman Brothers. BP has over 80,000 employees worldwide and quarterly revenue that regularly tops $70 billion. It will take a pretty massive hole to sink that ship, and I just don’t think the Gulf oil disaster — as horrible as it is — is bad enough to topple the company. Besides, the cancellation of BP’s quarterly dividend is going to free up even more cash to pay the bills.
Don’t get me wrong, I am not cheerleading for BP’s management. I am as troubled by this economic and environmental disaster as anyone, and I believe they should pay the price for their reckless behavior. But when I do the math, that price just isn’t big enough to warrant BP’s rock-bottom share price right now or to fuel further declines in the months ahead.
Consider that the worst oil spill penalty in history was Exxon (XOM[3]) Valdez, and in that case the initial judgment against the company was for $5 billion. After seemingly endless litigation almost a decade later those damages were adjusted down to just $500 million. Now I’m not saying that BP’s penalties won’t be significantly larger. But it just goes to show that often the damages are inflated at first and then wind up costing a company less.
And don’t forget the political pressure to keep BP around. BP had a market cap of about $180 billion before the oil rig explosion in the Gulf. With the U.K. still being our biggest political ally, do you really see the Obama administration driving a company of this size out of business? That would be the equivalent of England forcing the failure of an iconic blue chip like IBM (IBM[4]) General Electric (GE[5]) or Procter & Gamble Co (PG[6]) — all of which were smaller than BP by market cap before the spill.
The PE ratio[7] of BP right now is around 5, but don’t get greedy. I am behind the stock for the next six months and see upside of 15% to 20% — until the huge scope and scale of the spill is finally understood and the liability made clear. My sell target is $37.
There are certainly risks involved with buying BP right now, most of it stemming from uncertainty over just how much is enough for Congress, environmentalists, the Gulf Coast and regular Americans watching the disaster on TV. I remain confident that nobody really wants to see BP fail — and that once Wall Street can say this for sure, the stock will quickly take off from its current valuation.
Yes, there is a very real chance BP will go bankrupt from this mess — but there’s also a chance it could deliver big profits to savvy investors who buy in right now.
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