BP's Contrarian Performance: Can Earnings Justify the Divergence?

The broader equity markets have surged in recent months, yet BP (NYSE: BP) has moved in the opposite direction—a divergence that has left investors scratching their heads. While the S&P 500 has climbed to record highs, BP's stock has stumbled, down nearly 15% year-to-date. This article dissects the disconnect between BP's weakening share price and its peers' gains, focusing on deteriorating earnings forecasts, a stark Zacks Rank downgrade, and overvaluation metrics that raise red flags for near-term investors.

The Earnings Forecast Deterioration

BP's recent performance hinges on relentless downward revisions to its earnings per share (EPS) estimates. Analysts have slashed the consensus EPS for the quarter ending June 2025 to $0.65, a 36.9% drop compared to the same period in 2024. This downward trajectory is even more pronounced when considering full-year 2025 projections, which now stand at $2.33—a 28.5% decline from 2024's results.

The revisions reflect mounting operational challenges. Despite a projected 25% year-over-year revenue rise to $60.31 billion in Q2 2025, BP's margins are crumbling under the weight of rising exploration costs and weak refining margins. Compounding these issues is its negative dividend payout ratio of -413%, meaning earnings are now insufficient to cover dividends—a stark contrast to its historically reliable income stream.

The Zacks Rank: A Strong Sell Signal

BP's Zacks Rank #5 (Strong Sell)—the most bearish rating in its system—underscores the near-term risks. This downgrade stems from deteriorating earnings momentum and valuation concerns. The rank's algorithm factors in 12 months of analyst revisions, and BP's consistent downward trajectory has triggered a red flag.

Historically, Zacks Rank #5 stocks underperform, with BP averaging a -6.2% return over 30 days after similar downgrades. The current rank suggests investors should avoid buying BP at current levels unless there is a material positive surprise in its July earnings report.

Valuation: Overpriced Relative to Peers

BP's valuation metrics further complicate its appeal. Its Forward P/E of 12.4 exceeds the oil and gas integrated industry average of 10.15, while its PEG ratio of 1.88—a measure of growth valuation—signals overvaluation relative to its peers. These metrics suggest the stock is pricing in a recovery that may not materialize, given the company's structural challenges.

Contrarian Opportunity or Value Trap?

The disconnect between BP's falling stock and the rising market creates a classic contrarian dilemma. While the company's pivot to “core hydrocarbons” under CEO Murray Auchincloss has drawn criticism, its sale of non-core assets like the Castrol lubricants division could free up capital. However, these moves may not offset the risks of an energy sector transitioning toward renewables.

Investors must weigh two narratives:
1. The Bear Case: BP's declining EPS, overvaluation, and negative dividend dynamics make it vulnerable to further declines. A pullback below $27.50 could signal a deeper correction.
2. The Bull Case: The stock's current price may already reflect worst-case scenarios, offering a buying opportunity if earnings stabilize or the company announces a strategic shift.

Investment Advice: Proceed with Caution

While BP's valuation and Zacks Rank suggest caution, the stock's recent dip has created a potential “value trap” for unwary buyers. Until three catalysts materialize, investors should remain skeptical:
- A positive earnings surprise in the July report.
- Evidence of margin stabilization or cost discipline.
- A re-rating of its valuation as energy markets stabilize.

For now, the Strong Sell recommendation holds. Aggressive investors might consider short positions or put options to capitalize on downside risk. Conservative investors should wait for a clearer signal—such as a sustained rebound above $35—or a strategic pivot to renewables that aligns with market preferences.

In conclusion, BP's contrarian performance is no accident. Until the company proves it can navigate its earnings challenges and valuation overhang, the stock remains a high-risk play in a rising market. For most investors, patience—and a strict stop-loss—may be the wisest strategy.