When stocks we're interested in fall sharply, mass sell-offs are usually the cause. Savvy investors know that those moments can present great opportunities if we're brave enough to buy. But sometimes, those irresistible prices are not the bargains we think they are.
It's hard not to consider BP (NYSE: BP) as a possible addition to your portfolio these days. The stock has fallen some 30% to 40% since The Big Leak began in April, and its trailing price-to-earnings (P/E) ratio is a tantalizing 6. To put that in perspective, the company's average P/E over the past five years has been 10, according to Morningstar.
Moreover, peers ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) trade at pricier multiples right now, and their current P/E levels actually exceed their five-year averages. One measure is never enough of a basis to draw solid conclusions, but by that measure at least, BP clearly looks like a relative bargain.
And there's more! BP's recent trailing dividend yield was a whopping 9%, far exceeding any bank account or CD, or even most bonds. Even if the stock doesn't budge for the next few years, the dividend alone would give you a return close to the stock market's average annual long-term return. (ExxonMobil's yield? Just 3%. Chevron's? 4%. Feh.) Better still, BP has hiked its dividend at a higher average annual rate than either of its two oil rivals.
Cautions galore
Alas, unless you really welcome risk, those attractive metrics still aren't enough to justify buying the stock. A low P/E doesn't mean the stock won't fall lower. Indeed, about two weeks after Deepwater Horizon disaster, BP's stock fell from around $59 per share to around $49. You might not have thought the company's shares would continue to fall past that point (a P/E of around 7, well below BP's historical average), but they did.
Hefty dividend yields often signal trouble -- which a company often addresses by cutting its dividend. General Electric (NYSE: GE) looks attractive to many people right now, providing technology for alternative energy, health care, and other critical fields, and boasting global reach and great diversification. But it gave its dividend a big haircut in 2009, from an annual $1.24 per share to $0.40, and the company is still carrying a lot of debt. Dividends are promising, but they're not promises. The $10-billion-plus that BP pays yearly in dividends may well be reined in.
Uncertainty is dangerous
More than anything else, the sheer uncertainty surrounding BP is the best reason to think twice about jumping into an investment. If you ask me, there are way too many unanswerable questions right now:
- How much will it cost to stop the leak and clean everything up?
- How much of that burden will BP bear?
- Will it face massive legal costs, in addition to clean-up costs?
- How big a hit will the company's reputation ultimately bear? (Will it be out of favor with consumers, and therefore lose market share and revenue?)
- Will it even remain an independent entity, or will it be bought, in whole or in pieces, by others? Will it file for bankruptcy protection, wiping out shareholders?
Some investors, not troubled enough by these questions, are considering buying the stock. I'd rather look at more attractive stocks without any of those uncertainties.
I recently screened for low P/Es and high revenue growth rates among stocks that have fallen 20% or more in the past six months. My search turned up plenty of results, including Cameco (NYSE: CCJ), Neutral Tandem (Nasdaq: TNDM), and China Security and Surveillance Technology (NYSE: CSR). All three sport five-star ratings (out of five) in our Motley Fool CAPS community.
Each of these companies presents an intriguing upside without the kind of massive uncertainty that surrounds BP. Cameco deals with uranium for nuclear power plants, and the BP disaster may actually boost interest in nuclear power. The company has been upping production and seeking acquisitions, and stands ready to profit from increased demand for uranium.
Neutral Tandem is a telecom interconnection specialist with a strong balance sheet and rapid revenue growth. It faces some uncertainty of its own, with per-minute revenue dropping and some patent litigation outstanding, but it still has promising prospects.
China Security and Surveillance offers the lure of the burgeoning Chinese market, and at half off, I think it's more of a bargain than ever.
No company is without some risk, and risks should be weighed carefully. But there's rarely a good reason to take on a lot of risk on a seeming deal when you can find other bargains instead.
What do you think? Would you invest in BP at these levels? Let us know; leave a comment below!
