The BP (LSE: BP) share price has missed out on the latest leg of the FTSE 100 rally, falling 1.75% in the last month while the index as a whole rose 5.36%.
Supermarket chain Sainsbury’s (LSE: SBRY) did better, rising 2.73% over the month, but it’s still trailing too.
It’s been a disappointing 12 months for both stocks, with BP up just 1.67% and Sainsbury’s falling 5.6%. The FTSE 100 climbed 7.67% in that time.
I’m forever on the hunt for underperforming stocks in the hope of bagging a bargain. I’m particularly keen on buying stragglers as the index breaks record highs. It reduces the risk of overpaying and offers a recovery opportunity too. So what about these two bad boys?
Looking for value
BP shares remain inextricably linked to the oil price. With crude declining slightly, it’s no surprise to see them dip. On Tuesday, it reported a disappointing drop in Q1 profits, with falling oil and gas prices mostly to blame. An unplanned outage at a US refinery didn’t help. Nor did “significantly weaker” fuel margins. Punishment was inevitable.
The oil major is still making heaps of money, of course, which allowed it to launch yet another bumper share buyback, this time of $1.75bn. Much now rests on the oil price, which really could go either way from here.
Sainsbury’s full-year results, by contrast, were better than expected, with underlying pre-tax profit up 1.6% to £701m, beating the board’s own guidance of £670m-£700m. That’s still pretty modest, but forgiveable, given the cost-of-living crisis.
Food sales did okay but clothing’s struggling and Argos isn’t the hoped-for game changer. Next year should be slightly better, with the board expecting “strong profit growth” of between 5% and 10%. Sainsbury’s also launched a share buyback, although at £200m it pales against BP’s gusher.
Tough choice
BP, like most commodity stocks, tends to be cyclical. For me, that makes it particularly important to buy when it’s down rather than up. It looks cheap today, trading at 7.1 times trailing earnings, against 12.4 times for the FTSE 100.
BP’s been slowly rebuilding its dividend after rebasing in 2020. It now has a forecast yield of 4.8%, nicely covered 2.8 times by earnings.
Sainsbury’s looks reasonable value, trading at 12.3 times earnings, but that’s pricier than BP. It’s forecast to yield 4.83% in 2024, with cover of 1.7 times. However, it’s held its dividend per share at 13.1p for three years now.
Sainsbury’s also has wafer-thin operating margins of just 1.6%, as big supermarkets often do. BP has a greater cushion, with margins of 12.3%. So which would I buy?
BP looks cheaper with superior share price growth and dividend prospects, but greater potential volatility. Its stock could fall further if crude retreats, while the Sainsbury’s share price could rise when interest rates fall and shoppers feel better off.
These are different risk profiles and the two stocks actually complement each other nicely. I’d buy them both, if I could. Since I can only afford one today, I’ll go for BP while it’s out of favour. With a long-term view, of course. I’ll come back for Sainsbury’s when I have the cash.
