Could BP plc And Tesco PLC Be The Comeback Stocks Of The Year?

BP (LON: BP) and Tesco (LON: TSCO) have been in a dark place lately but Harvey Jones says that brighter times may lie ahead.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

2015 was a disastrous year for FTSE 100 stalwarts BP (LSE: BP) and Tesco (LSE: TSCO). These are two of the biggest names on the index, and operate in very different sectors, yet both suffered the same grisly fate. BP is down 20% over the past 12 months, while Tesco is down 30%. And this is no short-term shakeout. Over five years BP is down 35% and Tesco is down more than 60%.

Faded glories

Investors shouldn’t approach either stock expecting a return to the glory days. At today’s price of 327p, BP is way below its all-time high of 711p, achieved back in April 2006. This is worth repeating: BP is trading at less than half its price of a decade ago. With oil in free fall, that distant peak may remain forever out of sight.

Tesco peaked at 491p in November 2007, shortly before the financial crisis. It now trades at less than one-third of its all-time high, at 152p. With the grocery sector under sustained assault from Aldi and Lidl, wage packets still slim and margin-crunching deflation rampant, few expect Tesco boss Dave Lewis to restore the glory days either.

Fighting back

That doesn’t mean you should abandon either stock. At today’s knockdown prices they don’t have to scale former peaks to be a profitable investment. There are signs of a recovery lately, as both stocks surprisingly defy the wider market rout. BP has been fuelled by a SocGen upgrade from hold to buy, with the bank praising its foresight in predicting last year that oil could drop to $45 a barrel and stay lower for longer, at a time when markets were still expecting $80 to $90.

Forewarned is forearmed, and by cutting costs early SocGen reckons BP will be able to balance cash flows and sustain its dividend until the oil price recovers. This is based on the assumption that oil will hit $60 next year, which I reckon is feasible, as the US shale shake-out belatedly begins. It would be quite some feat if BP did sustain its dividend, given that it currently yields 8.5% and cover has fallen to 0.5. But it does look a tempting play for bold contrarians.

Christmas Cracker

Tesco is actually up 5% over the past month after beating downbeat forecasts to enjoy a happy Christmas (a rarity in recent years) with UK volumes up 3.5% and transactions up 3.4%. That’s particularly impressive given the wider seasonal grocery drop. Lewis pinned the festive fun on lower prices, a strong product range and much-improved customer service, three areas where customers have been crying out for change.

Tesco has also enjoyed success in womenswear and knitwear, while posting growth in Europe and Asia, notably Thailand. Trading at 16.2 times earnings, it’s hardly dirt cheap, while its forecast yield for February 2017 is thin gruel at 1%. Also, its Christmas success must be set against signs of continuing Tesco decline in the third quarter.

Both BP and Tesco could make a surprise comeback. All BP really needs is a reversal in the oil price, which will surely come, the only question is when. Tesco has a harder task ahead of it, as the UK economy and consumer wage growth slows.

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.

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

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »