You Probably Won’t Like This Oil Company

Every time I write about today’s investment topic, people unsubscribe by the hundreds.

I know because I can see my subscriber numbers drop in the days afterwards. There’s always a spike in cancellations when I write about it.

But in all honesty, with every ounce of sincerity I can muster, I think you’d be foolish to ignore this investment.

Before I tell you what it is, let me tell you all about it.

It’s one of the biggest oil companies in the world. It has wells and production in nearly every significant oil-producing region.

Right now, it’s the cheapest major oil company by a long shot, selling for less than 7 times forward earnings. It also pays the biggest dividend out of any major oil company (5.2% annual yield as of this writing).

But it’s in a little bit of legal trouble.

That should be the only clue you need. I’m talking about BP (NYSE: BP) – the oil company now taking the lion’s share of the blame for the Gulf oil spill of 2010.

Listen, I’m not making any value judgments about BP, or trying to downplay the spill. It was terrible. Many people in the Gulf region still aren’t whole.

If you’re worried about BP’s legal troubles, I can’t blame you.

But consider that BP gets most of their revenue outside of the United States. So this temporary ban on oil contracts that’s hitting the front pages of newspapers today isn’t the end of BP’s profitability.

I expect the oil spill will have a negative effect on the company’s future profits – but that negativity is already built into the stock price.

Could it go down more? Sure, but with a 5.2% dividend, we can be a little bit patient with this company.

Does it feel good to buy a company that’s responsible for such a terrible accident?

No – but if we make a hard-line value judgment for every investment we make, then we’ll never end up buying anything – especially in the commodity space.

The only moral question there is when it comes to investing should be, “Will this investment make me money, or not?”

Because losing money is not moral. It means the destruction of the work and savings you strived to build. Destroying your life’s work is a heavy weight on the scales of morality.

I’ve said it many times before but it bears repeating: the average stock market participant has the memory of a goldfish.

In 6-12 months, this bad news about BP will be long forgotten, and the stock will likely be more expensive. Waiting to buy AFTER the stock goes up is the strategy most people will employ.

The real question is: do you have the will power to be a contrarian right now – or will you pass on this investment until the market forgets all about BP’s legal woes?

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