The Rocky Balboa of Stocks
Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Learn From This American Icon
Rocky Balboa is the quintessential American boxing icon. No fighter—real or fictional—inspires us to never give up, to take a hit (or two, or fifty!), and to get back on our feet when knocked-down, than “The Italian Stallion.” Our hearts ached when he was thumped by Apollo, slammed by Thunderlips (Hulk Hogan), berated by “Clubber” Lang (Mr. T) and pummeled by Ivan Drago. When the situation became most dire and his defeat was imminent, we cheered as Rocky searched his soul and inspired us through his increased willpower and resurgent strength. When dazed, he stayed on his feet. When knocked-down, he always got back up again.
Nearly every American loves an underdog. Maybe it’s because of our Judeo-Christian heritage, where we all learned and loved to hear the biblical story of the young boy, David, plucking up his courage and eventually defeating the invincible giant, Goliath.
Or maybe it’s due to our sports fascination. Americans throughout the country (barring New Yorkers) collectively cheered when the Red Sox finally broke the 86-year “Curse of the Bambino” and defeated the mighty Yankees before winning the World Series in 2004.
What is it that inspires us to keep on trying? To not quit when we’ve been punched and knocked-down by an “invincible” opponent? To play our hearts out when we’re on the brink of playoff elimination, and win four consecutive games to shake-off the curse?
Today, I want to show you the current “Rocky Balboa” of stocks and explain how we will ride its indomitable spirit to victory as value investors.
The World’s “Rocky Balboa” of Oil Stocks
April 20, 2010, was a very bad day.
On that day, an explosion on a deep-sea oil platform called Deepwater Horizon tragically killed 11 workers and injured 17 others. Following the explosion a massive, uncontrollable gusher of crude oil began spewing into the Gulf of Mexico. Nearly three months later, under the dazed gaze of millions of onlookers from around the world, the gushing wellhead was finally capped. However, the largest accidental oil spill in history had released almost 5 million barrels of crude oil into the waters of the Gulf of Mexico, unleashing public outrage and lawsuits worth multiple billions of dollars.
The watching world was shocked that such a thing could occur in the modern era. Investors, too, were horrified, sending shares of this company plunging to oceanic depths—from nearly $60 a share prior to the accident, to a low of $27.02 in June, 2010. Previously robust dividends were halted for nearly nine months, before being cautiously resumed again in February 2011.
Obviously, the company we’re buying today is the notorious: British Petroleum (NYSE: BP).
Over the ensuing one to two years, this resilient stock has posed a modest recovery, swimming in a zig-zagging, sideways pattern between $35 to $49. This price action is discouraging to the vast majority of “investors” who remain skeptical of the company’s future; but should be exciting for discerning investors like us! I write this for multiple reasons:
BP is dirt-cheap.
With a price-to-earnings (P/E) ratio of 7.6, BP is selling for less than half the price of the S&P 500, which trades at about 17x. Once litigation against the company has been resolved—and BP is working furiously to resolve the remaining grievances—BP will again become a dominant player in the worldwide oil and gas industry.
BP’s dividend is massive, and will only grow from here.
At current prices, BP sports a gargantuan dividend of 5.2%, paid quarterly. Given the terrible blow to its reputation during the Deepwater Horizon disaster of 2010, you can bet that BP will do everything it possibly can in the future to be seen as a safe, dividend-growing company for investors of all stripes.
I like to compare BP’s dividend to traditional “safe” investments, such as a bank savings account, certificate of deposit (CD), or U.S. Treasuries—all earning between 0%-2% before inflation. Not only does BP’s 5.4% dividend crush traditional (money-losing) investment vehicles, it will almost certainly increase its payouts over time, as it did in the past.
All of the past, current, and future bad news has essentially been priced into BP’s share price.
Unless you live under a non-financial rock, you probably heard that BP was recently slapped with the largest fine in the history of the U.S. Department of Justice: $4.5 billion. While that is a freakishly large amount of money, it may be comforting for you to know that BP pulled in just over $26 billion (yes, billion) in Net Income in 2011. The market seemed to understand this as well, as BP’s stock price barely flinched at the news. BP is also hoping to (and probably will) reach a settlement in the remaining civil claims before the trial is slated to start in February 2013.
On November 28, 2012, we also learned that the U.S. government intends to ban BP from new government contracts. Is this the dreaded uppercut that will send Rocky to the mat? My opinion is that this ban is more political posturing than actual business penalization. The market apparently agrees, as shares of BP have actually gone up (yes up!) since the announcement.
Similar to Rocky, BP continues to absorb blow after seemingly devastating blow, but remains resolute and determined to fight on. With such a persistent and inspiring attitude, BP will someday return to its former status as a world-class oil major.
The zig-zagging, sideways pattern of BP’s stock price with underlying stability makes it an ideal candidate for making extra income with safe options.
One of my favorite ways to “invest” in BP is not to set a limit order, but rather to make extra income with safe options. These include selling (to open) naked puts when the price is trending lower, and selling (to open) covered calls on shares I own when the price is trending higher. This is a fantastic, safe way to make “free” money from the Wall Street gamblers who choose to pay us. If you don’t understand what it means to sell puts and covered calls, don’t worry; I’ll teach you exactly how to do so in future issues. You can also consult my other educational articles on www.JWRossInvestments.com if you are eager to learn now.
In summary, I recommend you buy BP up to $45. Or, better yet, sell (to open) puts on BP and earn safe, easy income. Regardless of your choice, BP will be added to my Investments for the Long-Haul Portfolio, found at www.JWRossInvestments.com.
JeffRossMD is Long BP and is currently selling January naked puts on BP. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!