Whether people want to admit it or not, President Donald Trump has been good for the markets. The benchmark exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 5% year-to-date. This is fairly remarkable, considering that since the beginning of March, Wall Street has hit a slow patch. The one sector that hasn’t quite received the benefits of the “Trump rally” are energy stocks.
It’s a reversal of fortune for companies like BP Plc (ADR) (NYSE:BP). Once a poster child for oil stocks mired in a public relations crisis, BP eventually clawed its way back.
While I won’t excuse the horrific damage that the company caused in the 2010 oil spill, what’s done is done. People and corporations can’t wallow in their mistakes forever. BP took it on the chin, and soldiered on, ultimately gaining 31% in 2016.
Right now, however, the enthusiasm does not appear to have carried over. BP stock is down 6.3% since its January opener, and is struggling to break out of the doldrums. Since early February, BP has largely gone nowhere.
Naturally, several investors are frustrated.
The “good news” about the pedestrian trading is that energy stocks overall are heavily burdened, particularly big oil stocks. Marquee rivals such as Exxon Mobil Corporation (NYSE:XOM), Royal Dutch Shell Plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) and Chevron Corporation (NYSE:CVX) haven’t shown much to their shareholders, either. Therefore, BP stock is unlikely to lose much volume to its core competitors.
However, schadenfreude has limited value on Wall Street. Can BP stock rise above the fray in energy stocks on its own merits?
BP Stock Has a Mountain to Climb
At first glance, that notion doesn’t seem very plausible. As InvestorPlace writer Tom Taulli notes, BP is not blessed with great financials. Against key metrics such as profitability margins, return-on-equity, and sales growth, BP stock is consistently terrible. Worse, the company ranks well below the average among big oil stocks.
That’s saying a lot considering the pain inflicted against energy stocks in general. Major clunkers exist within the sector, dragging the entire average way down. Even with that mulligan, BP stock fundamentally looks extremely ugly.
Then, as Taulli states, you have to factor in oil price volatility. Frankly, energy stocks are getting a bum deal so far this year because of their underlying indices. Apparently, the international benchmark Brent Crude Oil is still deciding whether it wants to play “good cop” or “bad cop.” Currently, it’s playing bad cop, with the Brent index down 7% year to date.
Finally, some high-level headwinds are making their presence known. Acting as the biggest culprit is the U.S. Dollar Index. The greenback has lost significant ground this year, down more than 2%. Still, it is unusually elevated against historical averages. Furthermore, the hawkish tone that the U.S. Federal Reserve is transmitting isn’t doing BP and other oil stocks any favors.
Don’t Overlook the Positives for BP!
On the flip side, the bearishness towards BP stock sets up a great contrarian play for the speculator. For starters, it was hit harder than other energy stocks in its class. Presently, Exxon-Mobil is down about 14% from its 2014 closing high. For Chevron, it’s even tighter at around 10% down. BP stock, though, takes the cake with a disparity of over 22%.
Even if shares don’t do particularly well, BP can still be a winner for shareholders. All it has to do is not crumble — a fairly reasonable task given what it has gone through already. Both Mr. Taulli and fellow InvestorPlace contributor Will Ashworth point out the 7.1% dividend yield. Not only is the yield substantially better than the competition, management is forced to abide by it, in a way.
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That might be wishful thinking. However, what’s not deniable is the technical stability that BP stock has found.
Yes, 2017 has started off on the wrong foot. From the close of Feb. 11, 2016 until December 2016 ended, BP has lifted skyward by a more than 30% margin. That magnitude of enthusiasm has to be corrected before it can begin a next move higher.
When factoring in an improving labor market, and the potential of vacationers hitting the road, BP actually has strong tailwinds. It’s a risk, for sure, but one that I believe is worth taking.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
