I'm sure that everyone is familiar with the oil company, BP even before the recent oil spill disaster in the Gulf of Mexico, which has been making the headlines beside the World Cup. The oil spill disaster has and will cause BP to pay billions in damages. With such a consequence, it is not surprising that the share price has taken a huge tumble from its recent peak of around $60 to its current price of around $28.
From a general point of view, without doing an in-depth analysis of the financials and business model of BP, I would say that the market is short-sighted with regards to the share price of this company. Why ? The main question for me will be, is the long term profitability of this BP being threatened ?
We don't have to look far back to see examples that are analogous to this. The SARS period that occurred in 2003 caused a decline in the stock market. This was because SARS represented a health threat worldwide. Companies that were affected by this includes those in hotels, tourism and aviation industries since people were very reluctant to travel and venture out due to the fear of catching SARS. On the other hand, there were companies who benefited from SARS and these companies are mainly in the healthcare and services segment. On hindsight, the market is rather short-sighted. This is because, all crises will eventually end although the time taken for the crises to end may be rather long. And if the crises only affects the companies temporarily but the long term profitability of these companies are not affected, the depressed stock prices of these companies may prove to be a bargain. As the SARS crisis ended, the stock market began to bounce back. Thus, those who managed to pick up bargains, benefited from the short-sightedness of the stock market.
Now given this example of the SARS period, do you think that the stock market is being too short-sighted on the long term profitability of BP ?
(The opinion expressed by the writer does not constitute an endorsement of the purchase or sale of the stock mentioned in the article. One should do a thorough research and analysis before deciding on any investment decisions)
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