I’d like to start by saying that this situation with BP (BP) is an awful one. It’s been called the worst ecological disaster in the history of the United States. This post isn’t about any type of political reform. I don’t know what should be done, or what should have been done, or what will be done. A random person off of the street has probably followed the situation more closely than I have, and will have more accurate insight and information. What I’d like to talk about is whether BP would make an intelligent investment at this point, and going forward.
At least one well known value investor, a fellow named Whitney Tilson, who was notably an early investor in the General Growth Properties (GGP) situation that I’ve talked about ad nauseam on this blog (and I’m probably not finished;). Before you play the video below, a couple of notes about Tilson. He’s not always right. This isn’t an insult, since no investor is, but early on in this situation he went on the record to say that BP wouldn’t need to cut their dividend. A week later, BP suspended their dividend. I’m not sure they needed to do so, but under government pressure and the pressure that is public opinion, they did so. With that in mind, Tilson is a solid value investor that’s done well in his career. Here’s his case:
This video is from June 9, 2010:
And here’s a written presentation:
Not everyone is sold on BP, of course. Tilson has inspired at least one article titled, Why Whitney Tilson Is Wrong. I don’t know who is right and who is wrong, but since Tilson started buying, the stock has taken a significant downturn, hitting $26.85 in after hours trading on Friday. That’s a 52 week low. That certainly doesn’t make Tilson wrong. He’s taking this position with the intention of holding it for an extensive period of time. But sometimes the difference between being too early and being wrong are impossible to distinguish…especially if in 6 months he could have put the money to work at $19 per share instead of $30 per share.
I have no idea where the stock is going in the short (or long, for that matter) term. I had a friend buy BP at $42. In hindsight it’s easy to say that was early. Another friend of mine bought at around $35. Mohnish Pabrai is famous for saying that he looks for opportunities with low downside and high uncertainty. We obviously have the high uncertainty. Opinions run the gambit from “BP will have to file for bankruptcy,” to “BP will reinstate their dividend next year and return to its highs.”
I tend to agree with Tilson that bankruptcy is unlikely, and even if a bankruptcy occurs, it probably won’t be the typical bankruptcy that wipes out all the equity holders. But I don’t know. The stock certainly looks cheap at around 4x trailing earnings. BP is certainly a company that produces huge positive cash flow. At this point, though – the uncertainty is overwhelming, and there is still plenty of downside at $26 per share. We have to deal with regulatory uncertainty, uncertainty as to liabilities, uncertainty as to how this will affect BP’s brand going forward (does their brand matter).
If you’re into being a contrarian, and buying out of favor stocks, I think you’d agree that stocks that are truly out of favor stay out of favor for years. Tilson makes the point that BP is going to be paying this back, not all at once, but over time, and during that time they will continue to produce lots of cash and earnings. The inverse of that assertion is that the cloud of this spill will be hanging over their heads for years, chipping away at their earnings and taking cash from shareholders and pouring it into their many liabilities. The best time to truly be a contrarian is when you’re having difficulty finding people that agree with you.
Warren Buffett is famous for his baseball to investing analogies. In one of his most famous, he likens investing to an at bat. Unlike baseball, though, you don’t have to swing. You can let 3 strikes go by. You can let 100 strikes go by. You can wait for the perfect pitch, a pitch that you are extremely confident you can hit. At this point, BP doesn’t look like that pitch to me. It looks like a play based on speculation. The time to make money is certainly when things are at their darkest, and perhaps we’re approaching that point. I think there’s a good chance that people who invest in BP will be successful. At this point, however, it won’t be me. If the price continues to fall, I’ll definitely take another look. Thanks for reading.*
*On a completely unrelated note, what do you think of the blog’s new look? It’s the oft used thesis theme. Should have a couple more subtle changes as I figure out what I’m doing.
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