Are Tesco plc, BP plc and BHP Billiton plc the craziest stock selections out there?

Royston Wild explains why investors should give FTSE 100 (INDEXFTSE: UKX) plays Tesco plc (LON: TSCO), BP plc (LON: BP) and BHP Billiton plc (LON: BLT) an extremely wide berth!

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Today I am looking at three FTSE 100 (INDEXFTSE: UKX) stocks that I believe are set to endure extended profits pain.

Ditch the driller

Despite fears that oil is looking dangerously overbought, the market continues to pay little heed to these concerns, keeping the likes of BP (LSE: BP) afloat. Indeed, the Brent benchmark continued its unlikely ascent in Thursday business, with values breaching the psychologically-critical $50 per barrel barrier for the first time since early November.

Still, I remain convinced that as the price of oil increases, so too does the chance of a painful correction, which would leave stocks caught in the current updraft, like BP, in serious peril.

Investors have cheered news that US oil inventories slipped last week, with a 4.2m-barrel drop confounding broker estimates for a much smaller fall. While this is of course a move in the right direction, stocks in the North American territory remain close to record highs around 540m barrels.

And with OPEC and Russia continuing to hike production — and cooling economic activity in China raising the prospect of a demand dive — I believe the huge supply imbalance could be set to persist, a worrying scenario for crude prices.

BP currently deals on a P/E rating of 28.1 times for 2016, sailing above the benchmark of 10 times associated with stocks carrying high risk profiles. This leaves plenty of room for a significant retracement, in my opinion.

A murky market outlook

Likewise, I reckon mining and energy colossus BHP Billiton (LSE: BLT) is also at the mercy of sickly fundamentals across major commodities markets.

And like BP, the company’s elevated earnings multiple also makes it a hot contender for a hefty share price fall, particularly should supply and demand indicators worsen. Indeed, BHP Billiton deals on an even higher P/E ratio of 70.3 times for fiscal 2016.

Of course, investors are happy to accept bloated multiples for stocks with solid long-term earnings outlooks. But the scale of material imbalances across commodities sectors makes the timing of any bottom-line bounceback at BP and BHP Billiton difficult to predict.

Besides, the vast scale of capital expenditure cutbacks and asset sales at both companies is likely to undermine their ability to benefit from recovering raw materials values once supply/demand problems begin to even out.

Tesco toils

I am also hugely pessimistic over the earnings prospects of Tesco (LSE: TSCO) due to the growing fragmentation of the grocery market. Discount chains Lidl and Aldi have been the major bugbear for Britain’s long-established chains, and the pressure is likely to keep rising as their aggressive expansion come to fruition.

Indeed, Lidl snapped up land just outside Bristol last month for a mammoth new regional distribution centre, one of several announced in recent months. The German chain earmarked £1.5bn to improve its UK operations in November, a programme that will also see new store openings and refurbishments at existing sites.

Tesco faces a hell of a fight to stop its revenue-rot, not to mention dealing with  intensifying competition in the lucrative online segment. And I do not believe a prospective P/E rating of 24.5 times fully reflects these long-term risks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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