BP Update: In-Depth Stock Analysis, Part 2

Includes: BP, XOM
by: Mike Stathis

<< Return to Part 1

Incidentally, when the stock market corrected in March 2009, BP (NYSE:BP) reached pretty close to fair value, but it did not undershoot. This is worrisome because the undershooting process is what establishes a real capitulation. Of course, that assumes that my estimate for fair valuation was accurate.

When the stock market does not undershoot after a long period of overvaluation, rather than capitulation, you usually get one or more bear traps. As subscribers to my newsletter know, I kept them in the market ever since my initial buy signal at 6500. Now you know why. While the market collapse did not undershoot, (as I warned of this possibility while issuing my buy signal) I was not certain it would do so. In addition, I might have been off a bit for my estimate of fair value. Regardless, I felt it had a good chance of mounting a rally somewhere near the 6500.

However, I have been very cautious because it is my opinion that the market will at some point fall by a large amount. It is very possible that new lows will be made, most likely sometime after 2010, although it is absolutely impossible to know in advance. If these lows are not at least retested by the end of 2012, there is a good chance they will not be tested in this cycle.

Now, I do not want you to get the impression that we are in the economic cycle because what we are seeing in no way resembles a typical economic cycle. All of these economists who keep referring to the economic cycle right now are completely wrong. If you do not know who to believe, I suggest you compare my track record to theirs. The cycle I am referring to is the secular bear market, which arguably began in 2001. In contrast, a depressionary period (which is what we are in) does not fall within a typical economic cycle.

The next chart compares BP and Exxon Mobil (NYSE:XOM) over the past three years. As you can see, the region where these two securities diverge in price has been encircled in green. As you will recall, this region includes the correction in the commodities bubble, followed a few months later in 2009 by the collapse of the stock market down to its 6400 lows.

First, notice that both BP and XOM shares collapsed by about the same amount from August through October. This was during the collapse in oil prices from the $147/bbl high. Shortly thereafter, you can see that XOM began to recover very well by the end of 2008, while BP was headed down:

(Click to enlarge)

In March 2009 when the DJIA collapsed, BP and XOM fell by about the same amount. However, because XOM has regained much of its losses during its rebound seen in November and December of 2008, its decline in March 2009 was not as severe relative to the pre-divergence period (early summer of 2008).

In the next chart, I show the past two years relative performance of BP and XOM. As you can see, where the left part of the green circle intersects the chart (late December 2009), XOM began underperforming BP. This is very important because XOM had outperformed BP for several years.

(Click to enlarge)

As the next chart shows, BP has pretty much traded in line with XOM except in the late ‘70s and early ‘80s, when it spiked, only to come back down a few years later. Also, XOM shows two periods of significant outperformance that were not price spikes, and thus more characteristic of true outperformance. The most recent outperformance period by XOM (2003 to current) has been perhaps the most significant.

(Click to enlarge)

The next chart spans the previous year. As you can see, while BP has traded pretty close to the DJIA, XOM has underperformed by a rather significant amount. Even with its current oil well issues, BP has still out performed XOM over the past year.

(Click to enlarge)

The next chart is year-to-date. More recently, BP experienced a nice surge beginning in April (where the dot is marked). A couple of weeks later, the disaster happened.

(Click to enlarge)

The next chart is also over the same time span. It shows the relative performance of BP, XOM and the DJIA. As you can see, BP outperformed XOM by about 4% just prior to the oil well leak.

(Click to enlarge)

So what does all of this mean?

First, you can slice 4% off the top of BP shares from the beginning because this was due to short-term overvaluation. What that means is that rather than calculate the fall from the recent $62 high, you must start with about $59. In other words, the fall in price BP experienced in the early stages of the oil well leak down to $59 had not factored in any damages, although most investors do not realize that.

The second point is that based only on this charting study, over the next few months, the performance gap between BP and XOM is likely to begin closing. In other words, BP will bottom and begin to gain on XOM; XOM shares will begin to lose more than BP; or some combination. This is based on the charting analysis presented in this article, although there are certainly numerous other variables at play.

Finally, from a longer-term standpoint, it would appear that XOM has more potential downside than BP based on current prices.

Disclosure: No positions