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The BP share price has been hitting multi-year highs. Time to sell?

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The BP  (LSE: BP) share price has hit levels this year not seen since before the Deepwater Horizon disaster of 2010. Furthermore, from the lows of the oil price rout in January 2016 to this year’s high, the shares have soared 83%.

However, if we look at BP’s long-term performance it only serves to show how exceptional the return of the past two-and-a-half years has been. It’s shares are up 8% over the last 10 years and 39% over the last 20. Even if we include its rich flow of dividends, 10-year annualised total returns of 4.6% lag well behind the 7.6% delivered by the FTSE 100 as a whole.

Value outed?

I think buy-and-hold investors will continue to do ok from BP but I also think a FTSE 100 tracker is a better option for buy-and-hold exposure to broad economic growth. With highly cyclical industries like oil, I reckon a value investing approach is a better strategy — buying stocks around cyclical lows and selling when you believe the value has been outed.

BP posted strong half-year results yesterday, showing the benefit of the significantly higher oil price this year than during the first half of last year. Analysts have been upgrading their earnings and dividend forecasts as the oil price has risen more buoyantly than previously expected. As such, at a current share price of 565p, BP trades on a forward price-to-earnings (P/E) ratio of 13.4 and prospective dividend yield of 5.5%.

However, my Foolish colleague Royston Wild recently explained why he believes the long-term fundamental outlook for the oil market “remains more than a little worrying.” The supply-demand dynamics Royston discussed may or may not play out, but certainly I can see a risk that they do. The value opportunity presented by BP’s shares in 2016 may have further to run but I take a prudent view that considerable value has now been outed. I’d be happy to sell the stock and bank profits at this stage.

Pricing reset

As a provider of funeral services and an owner of crematoria, Dignity  (LSE: DTY) should be a relatively stable business and a good candidate for buy-and-hold investors. However, its shares crashed over 50% earlier this year. The group had been increasing its funeral prices in an over-supplied industry, where customers were becoming increasingly price-conscious. Management took the decision to radically reset its pricing and warned that results for 2018 would be substantially below market expectations.

Since then the company has been researching and trialling what customers in different segments of the market want. It has also been reviewing how it can organise its operations more efficiently and effectively. The result of this review was published in its half-year report today. The market liked it. The shares are trading over 5% up on the day at 1,066p, as I’m writing.

New strategy unveiled

Dignity’s new strategy is built around enhancing the customer proposition, simplifying the operating model and streamlining support for operational staff. The three-year transformation plan will cost £50m (£17m from property disposals and £33m from existing resources) and management anticipates delivering £8m of annualised additional underlying operating profits by 2021.

The strategy looks sound to me and the transformation costs and additional profits appear eminently achievable. I’d say a P/E of 15.2, based on 2019 forecast earnings, undervalues the medium-term and long-term prospects of the business. As such, I rate the stock a ‘buy’.

Buy-And-Hold Investing

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.