On the flip side... with a focus on oil... and the "worst" big oil company possible...
The market gurus are pumping sunshine re tech stocks, and everything green, while market valuations are at record highs... and their predictions can't possibly be realized... even if there is no "set back" in the economy, or in the markets. So, avoid the hype... and focus on suppliers and tech innovators no one has heard about yet... or wait for it.
The excess in group think apparent in every market bubble... where over-valued but "must own" stocks have to window dress every fashionable portfolio... and thus have to be touted by market gurus to support the perception... (or generate an exit point enabling shares being sold to sheep at the top before the de-fleecing begins) also has an inverse.
The subject is... institutional ownership... and what it means to you... From Seeking Alpha, note this 2014 article addresses the subject with an even hand... thus earning it one "like". That lack of popularity perfectly in keeping with the theme...
The Gurus: Does Institutional Ownership Matter?
The focus, now, having just covered the EV market... is oil... and the worst possible oil company to own, if you are an institutional investor... and fully committed to "green good, oil bad"... while painfully aware of the need to be seen as a social justice warrior, in order to sell yourself as good enough to take money from other social justice warriors squirreling away money for retirement... knowing that Social Security will fail ?
I will side with Peter Lynch, of course... Big Wall Street types... can't buy small stocks. You can. So, you should... but should do so carefully... finding good ones. Do that, and you can easily beat the street. The big guys can't beat the street as easily, because they are the street. That matters not just in picks, but in timing... small companies are nimble, and can change things quickly when markets force change. Big companies... find that a lot harder. So undervaluation can persist in big companies... well after market events that impose it have turned around... even well after management corrections have been applied. That issue might echo and persist through more than one market cycle ? Eventually, undervaluation will be recognized and changed... so, in big stocks, look for it, which requires you know what it looks like: out of favor stocks, in the out of favor corners, in out of favor industries... who have earned their bad reputations, and suffered because of it... and who will continue to suffer, even long after having been reformed.
But, you also have to know what it is not: badly managed companies are not undervalued... they're just properly reflecting the value of bad management... leaving you to sort the sullied angels from the dirty demons...
Oil imploded, in 2020... catching some big companies unprepared... whether they were institutional favorites or institutional pariahs. The best managed companies are the street... the safest... and the least interesting to trade... because good management tends avoids those risks others realize and have to correct for after the fact... with the share price suffering the impact... and recovering with the success of corrections applied.
So, let's do a comparison... of two oil companies. One, a favorite of the institutions... another, the opposite.
I'll pick Chevron as the goody two shoes of this classroom... Look it up on Yahoo... compare its statistics with other big oil companies... note how its price changed during 2020... versus how much others changed ?
I'm not dissing Chevron... they are a really well managed company. But, my goal in the market is not to seek out and buy value others already recognize and impose a premium to own ? Can't beat the street by being the street.
So, let's start by considering the bad boys who were bad... but weren't good enough at being bad to avoid getting caught... or just didn't care... knowing it wouldn't matter. Being on this list isn't a proof of undervaluation... but the list is a proof that not all sins are equal in the eyes of the market gods... until they are... and, of course, change can happen suddenly... so, maybe those who are on this list... that aren't undervalued in result... really shouldn't be on your lists... even if the institutions do own them ?
15 Biggest Fines in History is worth the read, but gives only the worst #15 to #6... not shockingly, dominated by the untouchables in big tech, big banks and a drug company... only one oil company on the list, and it is now defunct... but then the list turns out to be a click bait feeder leading you to click on... 5 biggest corporate fines in history... each additional discovery from there requiring another click... #5 another bank... #4 bank repeat offender... #3 VW... fits our criteria perfectly... except not an oil company... #2 another evil bank (who defrauded me on a mortgage in 1996 by bundling me into an MBS in the good risk pool... in spite of my having deliberately contracted that the mortgage was not transferable)...
And the winner is....
BP... a direct link to the offenders mug shot... letting you avoid all the clicking.
...among the biggest companies in the entire world
... incident took place over a decade ago in 2010
...BP paid over $4.5 billion just for the criminal charges, largest ever in the history of the United States
...In July 2016, ordered to pay $20.8 billion the highest corporate fine in history.
... as of 2018, total cost at least $65 billion
...and yet it is still easily one of the biggest companies in the world by revenue.
Yeah. BP. No self respecting institutional investor can own it... now...
From 2010: Don't cry for investors burned by BP. They were warned loud and clear
The comparison...
CVX institutional ownership is 62.86 percent, BP is 8.24 percent...far below the number the first link mentions as being typical of any big company just for being big: "Most well-known stocks - e.g. household names like BP or Shell (NYSE: RDS.A) - would have at least 25% institutional ownership."
By revenue, BP's $180B vs CVX $95, but similar as BP's at $53 per share vs CVX $50 per share. BP is just a bigger company... and it has more debt... $82B vs CVX $35... while making less profit... BP's $25B vs CMX's $44B, losing $6 a share versus Chevron's $3 per share loss.
Chevrons price/sales and enterprise value/revenue are both 1.83... shares valued twice the $ metrics
BP's p/s is 0.41 and ev/r 0.69... shares valued at half of the money metrics...
Lots of upside there as potential... IF they can realize it.
Forward p/e of 13.5 versus 26 for CVX... CVX a 5% yld vs 5 year average of 4%, vs BP at 1% and 7%...
A bigger boat is slower to turn around... but higher oil prices will fix a lot of things... including converting the higher leverage and the larger production supported by it... into more of an advantage instead of a liability... while the carrying cost of their fines... directly sapping the dividend now... means others will benefit first as the boat turns... while it also extends or delays the opportunity long after others have moved.
So, a timing issue... giving us an upside to roll into... after others have moved to upside limits.
If oil continues higher... BP offers a more leveraged opportunity... on every score.... earnings should grow faster... the yield has upside... the p/e has room to expand... and BP is now posturing, again, as a leader in the conversion to green energy... maybe for real this time... so, the bad taste in investors mouths might fade a bit with more time... during which time the same risks are being faced by others and really aren't that much different...
I'm done... what do others think:
BP’s Weak Quarter Shows Big Oil Has Barely Begun Covid Recovery
"BP remains on track to meet its net-debt target of $35 billion between the fourth quarter of 2021 and first quarter of 2022, “which will trigger the start of share buybacks, subject to maintaining a strong investment grade credit rating”
Hold it for a year... and if the plan works... the debt will be down to the same as Chevron's ? Size matters. But there is clearly room for management to improve performance... as Chevron's higher performance in profits shows.
But, to be clear... BP is a bet on higher oil prices... not a bet on brilliant management... and notice that all of the quibbles Motley Fool presents... are arguments for higher oil prices:
Is BP Stock a Buy ?
I'm not going to argue with Motley Fool about the management... but some of those issues with projected changes that they address... aren't irrational choices being made by management... but a consequence of irrational choices being made by others... the consequences of which will be oil screaming higher.
BP and Other Offshore Oil Drillers Look Vulnerable to Biden Plans
"a total ban on new development wells could just about wipe out Gulf production in less than a decade"... making Biden en even greater risk to energy markets than Covid...
But, for investors steering a path in these markets... FOR NOW... higher prices are the primary impact.... when a huge source of supply is being withdraw from the market... just as demand begins to recover...
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