The simplest and most effective way to profit in the stock market is to buy stocks when they’re trading at low levels. After recent declines, BP and Shell shares are trading close to 10-year lows.
However, just buying any business because it looks cheap isn’t usually a sound investment strategy. But these two oil giants have some critical competitive advantages that should help them generate attractive returns for investors in the long run.
Shell shares on offer
The world economy is confronting enormous difficulties as a result of the coronavirus crisis. And as a result of these challenges, the price of oil has plunged.
At one point last week, the price of WTI crude oil was changing hands for nearly -$40 per barrel. In other words, suppliers were paying traders to take it off their hands.
In the short term, it’s unlikely these pressures will abate. Until the global economy returns to growth, oil demand will remain depressed. This will hurt BP and Shell shares in the short term. It’ll be even more devastating for their smaller peers.
However, both BP and Shell have strong balance sheets and good customer relationships. These businesses are also more than just oil producers. Shell is one of the world’s largest oil traders. Meanwhile, BP has been investing heavily in renewable energy (as has Shell).
Both businesses also have large refining operations. These operations should provide some cushion against further price falls. Refiners turn oil into usable products such as petrol, chemicals and plastics. As such, lower oil prices can mean fatter profit margins.
With these competitive advantages, BP and Shell shares look likely to survive the near-term challenges presented by coronavirus. Many other companies in the sector may not.
But if many of their peers collapse, the reduction in supply could force oil prices higher in the long term. That suggests that BP and Shell shares may not only survive the current crisis, but they could come out stronger on the other side.
All of the above suggests now could be the right time to buy shares in both companies.
While both BP and Shell shares are experiencing a challenging period that could lead to further declines in their stock prices in the short run, long-term investors can currently purchase these market leaders with strong recovery potential for a relatively attractive price.
The two firms are also committed to their dividends. At the time of writing, BP supports a dividend yield of 11%. Shell shares offer a yield of 11.7%. These numbers imply that investors will be paid to wait for the stocks to recover.
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Rupert Hargreaves owns shares in Royal Dutch Shell. 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.