Opinion: Steer clear when a crisis hits stocks, then buy

The time to buy, we’re often told, is when the blood is running in the streets. But does this nugget of contrarian wisdom apply when, instead of blood in the streets, it’s oil gushing into the Gulf of Mexico?

That’s the question we should be exploring this week, the seventh anniversary of BP’s disastrous 2010 Deepwater Horizon oil spill, which killed 11 people and injured 17 others.

Yet I’ve hardly seen any mentions of this anniversary, much less any attempt to draw any investment lessons from it.

To review what happened seven years ago: An explosion on a BP-operated oil drilling rig in the Gulf of Mexico led to the largest accidental marine oil spill in history — an estimated 210 million gallons. Several attempts to contain the spill failed, and it wasn’t until September that the leak was declared sealed.

Perhaps the most important investment lesson is that investors overreacted, while brave contrarians who bucked that pessimistic consensus were rewarded.

Consider: At its low point during the summer of 2010, BP’s BP, -0.23% BP., -0.03% stock was 56% below where it stood on the day of the explosion. There was widespread speculation that BP would not be able to survive in its then-current form.

Yet an investor who bought BP stock at that low point would have gained 9.0% annualized since then (according to FactSet). Though that is below the S&P 500’sSPX, -0.19%   gain over the same period, BP’s performance is actually quite impressive in light of what’s happened to the price of oil itself. On the day of the explosion at the BP oil drilling platform, crude oil CLM7, +0.45%  was trading for more than $80 a barrel, almost double where it trades today.

A more revealing comparison might therefore be with other stocks in the oil and gas industry. There, BP comes out far ahead: In contrast to BP’s annualized 9.0% gain since the summer of 2010, the SPDR S&P Oil & Gas Exploration & Production ETFXOP, -0.85%  has produced a 0.9% annualized loss.

Our confidence in drawing investment lessons from BP’s experience grows stronger when we realize that it’s right in line with how the stock market has reacted to other past crises. Consider what Ned Davis Research, the quantitative-research firm, found after analyzing the stock market’s reaction to more than four dozen geopolitical crises dating back to 1900 — including Pearl Harbor, the Cuban Missile Crisis and the assassination of President John F. Kennedy.

Even though the market plunged during those crises, Ned Davis Research found that the Dow Jones Industrial Average DJIA, -0.19%  within six months was higher than where it stood before those crises.

Of course, it took BP shares much longer than six months to recover. It wasn’t until mid-2014, four years later, that BP’s stock (including dividends) was back to where it was on April 20, 2010, the day of the explosion on its Deepwater Horizon rig. But its recovery was hampered by external events having nothing to do with the oil spill, such as the plunging price of oil.

Even so, BP stock did eventually recover and actually produce a handsome return.

This investment lesson doesn’t mean that investors should hope for another oil spill — or any disaster, for that matter. But catastrophes are inevitable, and it’s a good bet that when they occur, investors will overreact. Contrarians will react accordingly.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email [email protected]

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Loknath Das

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