Last week, the third most popular stock that investors bought through Hargreaves Lansdown was BP (LSE:BP). It didn’t feature in the top five most sold shares either, telling me that money’s heading in to the value stock right now. With the BP share price at 52-week lows, is now the time for me to buy?
Recent problems
First let’s run through some of the reasons why the stock has fallen 20% over the past year. Part of it’s due to the movements in the oil price. Being one of the largest oil and gas companies in the world, fluctuations in commodity prices has the potential to help or hinder the stock performance.
Unfortunately, the oil price has been falling recently. WTI Crude oil’s down 6.5% in just the past month alone. Concerns around over supply in the market has caused oil governing body OPEC to continue to cut production levels. Ultimately, lower prices mean that BP makes less money when it comes to refining and selling oil related products.
Another problem has been the continued economic slowdown in China. As one of the largest consumers of oil and gas in the world, lower demand in this key market isn’t good news for BP.
Why it looks good value
Despite these problems, investors clearly feel this is a dip worth buying. One reason to support this is the fall in the price-to-earnings ratio. With the share price dropping, this ratio now sits at just 6.17. This is below the benchmark figure of 10 that I use as a fair value. Therefore, it could indicate the stock’s undervalued and is worth me buying.
Let’s also not forget that despite the bad news with the oil price, the company’s been doing well on factors it can control. The latest Q2 earnings showed an underlying profit of $2.8bn, compared with $2.7bn for the previous quarter. It also managed to reduce net debt, alongside freeing up $0.5bn worth of cash flow to allow the operating cash flow to hit $8.1bn.
What this tells me is that the business is performing strongly and when the oil price starts to recover, the share price will likely follow suit.
Patience right now
I agree that the stock’s good value right now, but I still have a concern. There’s nothing to suggest to me that the oil price is going to rally in the immediate term. Chatter of a ceasefire in the Middle East would likely weaken oil further. The negative sentiment in the stock market from last week could easily flow into commodities too.
Therefore, I am keen to buy BP stock, but not right now. I’m going to be patient and come back in a month to see where things are then.
