Right now, BP is a true test for contrarian investors. It is hard to find a stock so reviled, a company so hated and a future more bleak than BP. But have we reached the point of maximum pessimism?
For a clue, let me go back to an anecdotal sentiment gauge that I shared with you back in the darkest days of the bear market. On Monday, October 20th 2008, the satirical news show, “The Colbert Report” talked about the CBOE volatility index and even showed a graph of it. At that time, I said, “Now watch volatility implode.”
Four trading days later on (Friday) October 24th 2008, the VIX spiked up to an intra-day high of 89.53 and the next trading day on October 27th 2008 it closed at the high of 80.06. While the volatility index did return to those heights again in late November 2008 - creating a double top, by the end of the year in 2008 it was below 40 and by the end of 2009 below 20. So all things considered, this anecdotal sentiment indicator was not too shabby.
When a comedy show that is watched by the general public refers to an esoteric stock market measure like the VIX, it isn’t hard to imagine that we’ve reached an inflection point. The same can be said right now for BP. If you were watching on Thursday, both Stephen Colbert and Jon Stewart referred to the dramatic decline in BP’s stock price.
Jon Stewart (on the Daily Show) showed a recent chart of BP which was clearly marked, with a red downward arrow, showing a decline of -51.7%:
Canadian readers can watch the clip here.
Colbert also made fun of the decline in BP’s stock, saying, “The only thing lower than BP’s blown well is their stock price. And then facetiously recommends it, “Investors, stick with BP and I guarantee you, we’ll all be in the black.” Adding later, “That’s my stock pick. Put everything in BP.” But he didn’t show a stock chart.
Canadian readers can watch the clip here.
They both poked fun at the recent press release from BP in which the company says, “The company is not aware of any reason which justifies this share price movement.”
At first, that might seem to be a surreal thing to say and both shows, as you’d expect, have a field day with it. But if you read the sentence before that it says, “BP notes the fall in its share price in US trading last night.’ - referring to trading on June 9th 2010.
The distinction that is lost among the public is that a company and its stock are two very different things. Simply buying a stock because you like their “story” or you use their products without any understanding of valuation is financial suicide. It worked for Peter Lynch, the famed Fidelity manager and he wrote “One Up on Wall Street: How To Use What You Already Know To Make Money In The Market”. That book made millions of amateur investors believe that they could just buy a shoe company’s stock because their kids liked their shoes.
The important thing to remember is that Lynch came on the scene at the start of a powerful secular bull market. He started running Magellan for Fidelity in 1977, right at the end of a grueling bear market that had pummeled stocks to astonishing valuations. In such an environment, it wasn’t too difficult to be an outstanding investor.
So if we distinguish between skill and market environment we quickly realize that the price you pay for something is important. And so is the gap between value and worth. This is where the naive investor makes his or her first mistake.
Right now BP is trading at such depressed levels that it is selling less than the sum of its parts.
As well, if you look at the long term chart, you’ll see that there is significant long term support under the $30 level. As a reader pointed out in the comments, the chart was wrong, so I’ve corrected it. In fact, BP has broken long term support and is now far above the next long term support level of $20/share.
Interestingly enough, both of the shows were on Thursday night, the day after BP’s shares had fallen dramatically in the stock market. But that was the low (for now) and BP has recovered from $29 to $33.97.
Scott Adams, the creator of Dilbert gets the distinction I made above. Sort of. Check out his WSJ article where he explains why he bought BP stock recently.
Since Adams is a nerdy clown, I’m not sure how seriously we should take him. But it really isn’t about buying companies that you love, nor is it about buying companies that you hate. It is all about what price you pay and what you get in return.
For more meaty fare, and less comedy, check out Barry Ritholtz’s 10 thoughts for those considering buying BP shares.
And finally, here’s the damage done to BP’s brand according to BrandIndex. The folks at Goldman Sachs might want to take a hard look in the mirror since they are actually trailing lower than BP!
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