2015 was a disastrous year for FTSE 100 stalwarts BP (LSE: BP) and Tesco (LSE: TSCO). These are two of the biggest names on the index, and operate in very different sectors, yet both suffered the same grisly fate.BP isdown 20% over the past 12 months, while Tesco is down 30%. And this is no short-term shakeout. Over five years BP is down 35% and Tesco is down more than 60%.
Investors shouldnt approach either stock expecting a return to the glory days. At todays price of 327p, BPis way belowits all-time high of 711p, achieved back in April 2006. This is worth repeating: BP is trading at less than half its price of a decade ago. With oil in free fall, that distant peak may remain forever out of sight.
Tesco peaked at 491p in November 2007, shortly before the financial crisis. Itnow trades at less than one-third of its all-time high, at152p. With the grocery sector undersustained assault from Aldi and Lidl, wage packets still slimand margin-crunching deflation rampant, fewexpect Tesco boss Dave Lewis to restore the glory days either.
That doesnt mean you should abandon either stock.At todays knockdownprices they dont have to scale former peaks to be a profitableinvestment. There are signs of a recovery lately, as both stocks surprisingly defy thewider marketrout. BP has been fuelled by a SocGen upgrade from hold to buy, with the bank praising its foresight inpredicting last year that oil could drop to $45 a barrel and stay lower for longer,at a time when markets were still expecting $80 to $90.
Forewarned is forearmed, and by cutting costs early SocGenreckons BP will be able to balance cash flows and sustain its dividend until the oil price recovers. This is based on the assumption that oil will hit $60 next year, which I reckon is feasible, as the US shale shake-out belatedly begins. It would be quite some feat if BP did sustain its dividend, given that it currently yields 8.5% and cover has fallen to 0.5. But itdoes look a tempting play for bold contrarians.
Tesco is actually up 5% over the past month after beating downbeat forecasts to enjoya happy Christmas (a rarity in recent years) with UKvolumes up 3.5% and transactions up 3.4%. Thats particularly impressive given the wider seasonal grocerydrop. Lewis pinned thefestive fun onlower prices, a strong product range and much-improved customer service, three areaswhere customers have been crying out for change.
Tesco has also enjoyed success in womenswearand knitwear, whileposting growth in Europe and Asia, notably Thailand. Trading at 16.2 times earnings, its hardly dirtcheap, while its forecast yield for February 2017 is thin gruel at1%. Also, its Christmas success must be set against signs of continuing Tesco decline in the third quarter.
Both BP and Tesco could make a surprise comeback. All BPreally needs is a reversal in the oil price, which will surely come, the only question is when. Tesco has a harder task ahead of it, as the UK economy and consumerwage growth slows.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.