Six months ago, I penned an article for The Motley Fool that discussed the possibility of a stock market crash, and in said article, I identified oil major BP‘s (LSE: BP.) shares as having the perfect qualities to be resilient in such an event. And, with a chunky dividend and oddly low valuation, the stock was a contender to be among the most overlooked across the entire FTSE 100.
What’s happened since? Along came a fresh new conflict in the Middle East; the price of oil flew straight past $100 a barrel; and BP shares have been among the Footsie’s best performers over the period.
Name of the game
In total the shares have leapt 39%, turning a stake of £7,500 invested into the oil & gas company into over £10,000 in around half a year. A few dividends were paid out during the period too, so the total returns would be even higher.
Full disclosure: I’m not claiming to be the latest iteration of Mystic Meg. While my particular point proved to be somewhat prescient, a similar view could have been offered years ago and been followed by not very much share price appreciation at all!
This is the name of the game for anyone who writes about or invests in stocks. For every dazzling prophecy that comes true, there’s a bum prediction that makes someone look like a bit of a donkey. The famous quote by Peter Lynch – who invested his way up to billionaire status – rings true here: getting six out of 10 right is a terrific record in investing.
But I think it highlights another truth: the stock market runs in cycles. For years, people have been decrying ‘dinosaur stocks’ like miners and oil majors while tech has been on the rise. Things can change though, and different sectors can be the ones to thrive.
Here’s the big question then: is this a temporary surge from BP shares? Or is it the sign of a lasting trend?
Changes
The first thing to note here is that the rapidly increasing share price has tweaked a few of the important numbers. The firm now trades at 17 times earnings – around the FTSE 100 average. BP is no longer offering the bargain basement valuation that we have come to expect from companies in the oil & gas business.
The dividend is looking less attractive too. The recent share price rise has brought the yield down to 4.21%. Notably, that figure could be below what savings accounts are offering if the purported multiple rate hikes come to fruition later this year.
The counterargument is that if the price of oil stays elevated, then those numbers will change. I’ve seen some talking heads say a $200 a barrel could be on the cards. That’s one of the reasons such a ‘defensive’ stock could be attractive to investors looking for more safety in an uncertain world. I’d say it’s one to consider.
