The purpose of this case study is to perform a post-mortem analysis of my 2015 investment in BP stock. A post-mortem case study is a method of analysis whereby an investor analyzes their investment process and results for a particular investment. The goal of such a study is to determine what lessons can be learned from the investment. I am studying my past decision making in order to improve my personal investment process.
I am sharing the results of my postmortem analysis publicly, in the hope that it will aid other investors. The key aspect to understand is not the specific discussion of this specific stock. Instead, you should focus on understanding my learning process and the importance of learning from your investing mistakes and successes.
Initial Buy Thesis for BP Stock in 2015
I initially purchased BP stock in August of 2015. Crude oil prices had collapsed from over $100 per barrel in 2014 to less than $50 per barrel in 2015. Due to the 50% drop in crude prices, the stock prices of many of the oil majors had declined significantly as well. I thought this was a prudent time to consider purchasing some of the largest oil producers in the world. BP was one of those companies.
At the time of my first purchase of BP stock on August 20th, 2015, BP was trading at $34.98 per share while paying out a $2.40 annual dividend. This dividend represented a 6.8% yield on cost. I found this dividend yield to be quite favorable because BP management was stated to stand behind the maintenance of their dividend payment. Historically, the dividend yield was a reliable lower limit to after-inflation returns. With 6.8% as my expected lower limit, exceeding the historical US stock market return of 6% per year, I felt quite comfortable investing in BP at the going rates.
Additional considerations for my BP investment
My core thesis for BP, as stated above, is that BP stock represented a favorable absolute investment return. However, BP was particularly favorable on a relative basis because I believed BP to be the weakest of the oil majors. (Note: The oil majors are ExxonMobil, Royal Dutch Shell, Chevron, Total, and BP.)
As the weakest of the oil majors, BP was also trading at a relative discount to its peers. This meant that BP not only had a favorable absolute return profile but a favorable relative return profile as well. I also believed that BP was still partly undervalued due to continued overhang from the BP oil spill in 2010. Negative press headlines and memory of the BP oil spill was likely to have continued to depress BP’s stock price below intrinsic value.
Therefore, I chose BP as a good investment target.
BP Stock Investment Results
I bought a majority of my BP stock in late August 2015. An additional share was purchased through the BP dividend reinvestment program (DRIP) in December 2015. My last purchase was made in August 2017, two years later. The charts below outline the results of my BP investment. All shares were sold on August 31st, 2018 at a selling price of $42.90 per share.
Disclaimer: The lot size (# of shares) for Lot #1, Lot #2, and Lot #4 have been modified to all equal 100 shares to hide the true size of my position. Lot #3 was truly a single share purchase through the BP DRIP program. This lot size was maintained to show the benefit of dividend reinvestment. I made these modifications to protect my personal privacy while maintaining the integrity of the investing results. The alternative was not to share the results or my analysis publicly at all. (Final CAGR calculation is accurate to within 0.4% of my actual calculated returns for all four lots)
Analysis of my Results
The first thing you’ll notice when looking at my investment results above is that all four stock purchase lots earned over 10% per years over the last three years. This handily beats the 10% annualized historic average return of the stock market. This is valuable to understand because I use a 10% discount rate as my baseline target in all investment analysis.
Based upon exceeding my 10% hurdle rate, I automatically start to feel good about the investment result.
Let’s dig a little further.
Key Observations
- Holding Period Matters
- My last lot (#4) earned the highest compound annual growth rate. I was able to exceed 30% annualized returns by buying the stock at around the same entry price as Lot’s #1 and #2, but holding for only a single year, instead of 3 years.
- Dividend Reinvestment Performance
- I reinvested only one of my eleven dividend payments back into BP stock. This is Lot #3. This dividend reinvestment lot earned 14% annualized returns. It’s possible that based upon my final results, it would have been better to reinvest all eleven dividend payments into additional BP stock, instead of investing in other companies. It is difficult to say for certain whether that is true, without understanding exactly the final performance of all of my alternative investment opportunities that were made during that timeframe.
- Purchase Price Matters
- There is a 4.8% annualized return difference between Lot #1 and Lot #2.
- They were only purchased 5 days apart. Yet, Lot #2 outperformed because the stock was purchased at a price that was 10.7% cheaper than Lot #1.
Analysis of my Process
Notice how analysis of my investment performance has thus far been colored significantly by the final result. While this is a normal way of analyzing an investment, you should not focus solely on the result of your investments when trying to learn how to make better investing decisions. Instead, you should focus on the investment process and less on the results.
The best way to analyze the performance of my investing process is to focus on my buy thesis and my sell thesis. Was my buy thesis correct? This question should be answered regardless of the financial result of the investment. It is possible to make a profit with a false buy thesis and to lose money with a correct buy thesis. I want to make sure that my reasons for investment are accurate. The accurate reasoning is the only part of the process you can control prior to investing.
Was my Buy Thesis Correct?
My buy thesis was built upon three main points:
- The crude oil price decline is not permanent.
- Oil stocks declined in a way that is only supported if oil prices have permanently declined.
- Result: Correct (Oil prices took less than 3 years to rebound)
- BP is paying a 6.8% dividend-on-cost which should be the lower bound on my after-inflation return.
- In addition, BP will not cut their dividend during my holding period.
- Result: Correct (BP did not cut their dividend, and my return exceeded a 6.8% real return)
- BP is not more likely than any other oil major to have an oil spill during my holding period.
- BP is cheaper than its peers because the recent oil spill is scaring investors away.
- Result: Correct (BP did not have a major oil spill during the past 3 years)
When you look back at each of the main points that my buy thesis was built upon, you can see that I correctly analyzed each pillar of my investment thesis. I would, therefore, say that my investing process regarding buying BP in 2015 was successful. I correctly analyzed the market situation for BP and determined that the purchase price for BP stock presented a favorable return profile.
Sell Thesis
The next part of my investment process that I need to analyze is my sell thesis. My sell thesis for BP stock is quite simple.
I sold all of my shares of BP stock on August 31st, 2018 because I have more attractive investment candidates available.
Primary Reason: Raising Cash for more attractive investments
My current portfolio is near 100% invested in stocks at this time. I no longer have the freedom that I did even a few months ago, where I could purchase new investments from cash on hand. Therefore, I’ve reached the point where I need to sell my current positions in order to fund new positions.
At this time, BP represents the lowest conviction holding in my investment portfolio. I actually think BP has a favorable investment return profile going forward. However, I currently consider the opportunity cost of continuing to hold BP stock to be too high. If I had to guess, BP stock continues to offer potential returns near 10% per year at its current prices. I’d say there is probably a 50% chance of BP stock outperforming 10% per year, and a 50% chance of BP stock underperforming 10% per year over the next 5 years.
In comparison, the best stocks in my portfolio today offer a reasonable chance of outperforming 15% per year during my holding period. That 5% differential is the driving force for selling BP stock today.
Is my Sell Thesis Reasonable?
I believe my sell thesis to be reasonable. Investors should have a solid hurdle in place before selling any of their current investments. I can think of only three reasons to ever consider selling an investment:
- Your Buy Thesis has been proven false
- Alternative investments offer a substantial increase in probable investment performance. Substantial is defined as greater than a 5% difference in annualized return.
- To spend on lifestyle
When properly purchased, stocks offer the ability to earn money without the input of your time. Therefore, you should be hesitant to sell such a productive asset. My sell thesis is based upon the second reason of opportunity cost. Therefore, my sell process has been reasonable.
Conclusion
My 2015 investment in BP stock was successful because my purchase process was successfully built around an accurate buy thesis.
Fortunately, my successful process led to a positive financial result. I purchased BP stock in four different lots, which earned annualized returns of 12.9%-30% depending upon the lot. Many other results were possible, so I should remember that I very well might have ended up with a less favorable financial outcome.
My key lesson learned is that I should consider buying BP or another oil major again in the future if they offer similar investment characteristics to the ones that I used to outline my 2015 buy thesis. This is a reasonable investing decision and should be repeated in the future if given the opportunity.
Disclaimer: This post is for informational purposes only and should not be considered investment advice. I do not know anything about your personal financial situation. Therefore, it is impossible for me to provide you with financial advice. This post is not a recommendation to buy or sell any investment. Please read my full terms of service for full disclosure and disclaimer information.
