Falling share prices have sent the FTSE 100 down 9% from its 52-week highs. But for a lot of investors, this could be a huge opportunity.
The index as a whole is down, but there’s a wide dispersion among individual stocks. And that’s what makes things interesting right now.
Oil prices
Two stocks have stood out from the crowd over the last month. Unsurprisingly, those are BP (LSE:BP) and Shell (LSE:SHEL).
Rising oil prices are good for both companies. But the trouble for the FTSE 100 as a whole is that they’re not good for much else.
Higher energy costs present companies with a dilemma. They can either increase prices and risk losing customers, or swallow lower profits.
The issue for the FTSE 100 is that it contains a lot of mining companies. And these have relatively high power requirements.
That’s been a big advantage in recent months. But it’s turned into a problem as oil prices have gone higher in the last few weeks.
Buy energy?
Anyone who doesn’t own oil stocks might be asking themselves why. I think, however, that there’s a good answer available.
Oil supply is under unusual pressure at the moment and that’s why prices are high. But this seems likely to be a temporary issue.
The situation in the Middle East is always uncertain. And that means there’s a constant chance of oil prices rising sharply.
Yet by itself, that’s not a good enough reason to own oil stocks. Investors need a more optimistic view of long-term oil prices.
Oil stocks might be the only ones going up. But does it make sense for anyone who didn’t like BP shares at £4.74 to buy them at £5.63?
Can it continue?
The stock market was slow to react to the conflict in Iran. It’s as if investors thought it might be over quickly.
That’s still possible, but it seems much less likely now. Despite this, it would be surprising to see oil prices go much higher.
The danger is more that prices stay where they are for a long time or come down slowly. And that’s a real possibility.
One reason for this is the US isn’t affected by higher oil prices in a big way. It’s in a position where it produces more than it uses.
That’s not the situation with the UK. And this is why the FTSE 100 has fallen more than the S&P 500 in the last month or so.
Definitely not oil?
The possibility of an extended conflict makes BP and Shell look attractive. But they’re both trading at high multiples.
For cyclical firms, the price-to-earnings (P/E) ratio isn’t always a good metric. Volatile profits can be misleading.
A more stable – and therefore better – metric is the price-to-book (P/B) ratio. But BP and Shell look expensive on this basis.
Both stocks are trading at their highest P/B multiples in over five years. So there’s a lot of optimism already priced in.
The current conflict shows oil stocks can offer useful diversification. But I think the time to look at them is when things settle down.
