Paul Hill's tip of the week: can this blue chip weather the storm?

Top investor Paul Hill picks a solid 'widows and orphans' stock as this week's tip - despite its recent well-publicised difficulties.

Paul Hill, one of Britain's most successful private investors, picks the best share tip from the week's press and brokers' reports

After last week's more speculative recommendations, I have chosen a solid widows and orphans' stock as this week's best tip.

Tip of the week: BP (BP., 595p) tipped as a BUY by HSBC

BP, with a market capitalisation of £117bn, is the world's third-largest oil firm, behind ExxonMobil and Shell. It boasts proven reserves of 18 billion barrels of oil, revenues of $250bn, and sells petrol in more than 25,000 service stations worldwide.

Clearly, it is a massive company and at current levels it represents a good buying opportunity for the cautious investor. Latterly, bad press has seen the shares fall back from their 12-month high of 712p: the stock has been hit by pipeline leaks at its Prudhoe Bay field in Alaska, an explosion at its refinery in Texas and allegations of price fixing in the

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propane market.

For long-term investors, I believe that these issues are relatively minor in the context of the whole company. As a general rule, I have found it much more profitable to invest when there is "blood on the streets", since fund managers tend to overreact to bad news and switch their portfolios to other areas. This stock rotation appears to have occurred over the past three months Shell has risen by 4%, while BP has fallen by a similar amount, which is unjustly harsh.

In terms of valuation, BP is projected to deliver earnings per share of 59.8p and 62.6p respectively for 2006 and 2007. This puts the shares on attractive p/e multiples of ten and 9.5 respectively for this year and next.

Due to BP's colossal size and diversity, don't expect the shares to race ahead in the near term. In the absence of a sector re-rating, we're more likely to see gains of around about 10% a year, generated by 6.5% capital growth and 3.5% dividend yield.

However, BP does have several challenges ahead. Firstly, in its desire to expand production by 4% every year, it is having to develop new fields in historically unstable regions. For example, nearly one third of BP's oil production comes from its share of TNK-BP, a leading Russian oil explorer, which has been hit by government claims for unpaid taxes. Secondly, exploration costs are rising and competition for new energy reserves is intensifying. Finally, there is ongoing regulatory risk, as lobbyists worldwide demand that governments raise taxes on the industry in light of fuel prices at the pumps continuing to rise.

On 9 June, I suggested that readers take profits on BP at 637p. But now, at around £6, the shares offer a natural hedge against the potential economic effects of a spike in energy prices and a solid (albeit not stellar) return. Personally, in contrast to the general opinion at MoneyWeek, I expect crude oil prices to moderate over time due to greater supply. However, this decrease has already been factored into City forecasts.

Recommendation: good long-term value BUY at 595p

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.