Are BP shares a steal, or would I be bonkers to buy them now?

Looking back, BP (LSE: BP) shares were a steal in October 2020 when they briefly dipped below 200p.

But investors need contrasting nerves of steel to buy the stock. We are in the grip of a pandemic and a lockdown. Oil prices are on the floor. And the BP looks more like a basketball bag than I can remember. It seems that profits will be about a month. No wonder the stock was dumped on the stock market.

A great contrarian play

However, good value investors and contrarian thinkers exist in all stocks. The extraordinary circumstances of the day are temporary in nature, right? And the profits will surely return to the business like day after night. The inevitable consequence will be a recovering share price.

However, my guess is that investors who actually buy the stock will be surprised to find it right. Of course, the war in Ukraine is a big boost to oil prices, which are largely unpredictable.

But last year’s bumper profits for the oil company drove BP’s share price higher than it would have been without the war. As I write, it sits near 558p. And it has returned shareholders around 180% since the dark autumn days of 2020. But there is dividend income on top of that.

I would say that BP has been an example of how contrarian investment strategies can work for investors when something clicks. Even over the past year, the stock has risen 50%. But here, the price does not seem to stretch. And that’s unusual. Often when a stock price is locked into a sustained uptrend, the move takes the price higher. And often go way beyond the same price.

Is it cheap, or what?

But the expected income multiple for 2024 is only about 6.7. And the anticipated dividend yield is just above 4%. Meanwhile, BP has used its cash flow to pay off some debt. And that has built up the attraction of business value even more.

So, by traditional valuation measures, BP shares look like a steal right now. But would I be bonkers to buy them after such a strong rise? Perhaps. Do not forget how quickly the company’s fortunes changed near the cyclical bottom in 2020. As if everything turned on the handbrake. And it can happen at the top of the cycle in the other direction. All it will take is for oil prices to fall and shareholders to hold on to their hats. Indeed, the share price will fall rapidly as profits fall again.

But the new outlook statement is surprisingly powerful. And City analysts have only predicted a mid-single-digit percentage in revenue for 2024.

However, I don’t see the low price as a reason to buy the stock. Cyclical businesses are ‘supposed’ to trade at low multiples after periods of high profits. So I rate BP as cheap now. But it will not be stupid to buy. However, I would be inclined to keep the stock on a short leash. And I will remain open to signs of the next downturn if I buy.