AJ Bell updates a list of the most bought and sold stocks each week. On the latest data, BP (LSE:BP) shares topped the list as being the most heavily sold stock. Yet given the share price is up 49% over the past year, why are people selling?
Banking profits?
The most obvious explanation I see is profit-taking. After such an impressive rally, some investors may be happy to lock in gains rather than risk giving them back.
Indeed, BP’s strong performance has been heavily influenced by rising energy prices. The conflict involving Iran has disrupted oil supplies, pushing crude prices higher and improving the outlook for producers.
However, this creates a potential problem for BP. If geopolitical tensions ease as we hope they will, and oil prices retreat, BP’s earnings could come under pressure. Investors buying today are effectively betting that favourable energy market conditions will persist.
Outside of this, some of the sentiment could also be attributed to company-specific concerns. BP recently warned of another $3bn–$4.5bn in impairments, primarily relating to its gas and low-carbon energy businesses. These charges highlight the financial consequences of its previous renewable energy investments, which management has since scaled back.
The bigger picture
Despite these concerns, when we take a step back the stock is still doing well through a long-term lens. Higher oil and gas prices for much of the past year have boosted revenue, while exceptional volatility has created opportunities for BP’s trading division.
In its latest trading update, BP indicated that stronger refining margins could add $1.9bn–$2.1bn to third-quarter underlying replacement cost profit compared with the previous quarter. More importantly, the business is putting these bumper profits to work in key areas. For example, it expects net debt to fall from $22.3bn at the end of June to approximately $13.5bn–$14.5bn at the end of September. That’s an impressive improvement, and helps the share price beyond just a good quarter.
Management’s renewed focus on traditional oil and gas, plus cost reductions and financial discipline have also helped rebuild investor confidence.
The direction of travel
Looking ahead, I’m describe my outlook as being cautiously optimistic.
A stronger balance sheet with lower debt should give BP greater flexibility to invest in profitable projects and hopefully increase earnings. However, if we do see oil prices fall due to actions in the Middle East, this could outweigh all those benefits.
It’s impossible to predict what’s going to happen on the geopolitical front. Aside from events there, the next important catalysts are Q3 results on 30 October and a strategy update scheduled for 15 December.
For me, BP remains an interesting income and energy-sector investment, but after the strong rally, I can understand why some investors are cashing in. I prefer to wait for a potential retracement in the stock before considering it.
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Jon Smith has no positions in the shares mentioned.
This story originally appeared on Motley Fool
