It is nice to see the market finally have a significant rally to start the week after posting deep declines five of the last seven trading sessions. That being said, I still believe the flight to solid high-yield blue chips and away from the high momentum stocks & sectors will be in a continuing theme in the second quarter.
One of those plays, BP Plc. (NYSE:BP), got a nice upgrade over at Canaccord today. The analyst firm moved the energy giant from "Hold" to "Buy." It also raised its price target by ~13%. Canaccord's analyst noted "the market is putting too much weight into the litigation surrounding the 2010 Deepwater Horizon oil spill" and also saw a "A compelling valuation argument is building in favor of BP based on the free cash flow generation potential."
I have BP as a core position in my income portfolio due to its high yield and decent capital appreciation potential. I also can see some positive catalysts as well as reasonable valuations to continue to recommend it.
Possible Potential Catalysts:
- Obviously the main catalyst is getting past all the litigation caused by the 2010 Gulf oil spill. The company has sold off tens of billions of assets to pay fines and settlements. I believe it is about the seventh inning of this game and the majority of its legal problems are behind it. It is taking a harder line with U.S. courts after an increasing amount of fraudulent claims which I find encouraging. By 2015, this legal mess should be in the rearview mirror.
- Mexico opening up its energy market to outside investors after being ruled by PEMEX for eighty years could be a nice positive. The country will need the expertise and investment from the oil majors to arrest a steady decline in production since 2000. BP with its deep expertise in the Gulf of Mexico should be well-positioned for this opening.
- Finally, the stock has been under some pressure due to its 20% stake in Russian energy concern Rosneft (OTC:RNFTF) due to the escalating Ukrainian situation. However, based on the tepid reaction by political leaders both domestically and in Europe; it is highly doubtful Putin's aggression will result in any long-term sanctions that will affect that relationship.
The shares pay a 4.8% yield. This is significantly higher than U.S. energy giants Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP). The stock goes for just 10x forward earnings and is selling at just ~15% above book value.
I am looking for 5% to 10% capital appreciation over the next year for BP in addition to its robust dividend yield. Not a huge return but better than I expect from the overall market. Given its high yield and reduction of litigation challenges going forward, I also expect it to be less volatile than the overall market as well. This is a good single in my book especially in what is likely to be some challenging times for equities. ACCUMULATE
Disclosure: I am long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.