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Tickers in this Article: BZP, APA, APC, BP
Oil and gas exploration company BPZ Resources (NYSE:BZP) is up more than 100% in 2008, a sizable gain by any standard. Investors may now be wondering how much upside is still on the table, and whether the stock could be entering dangerously overbought territory.

Exuberance Defined
When examining the psychology behind overbought stocks, we must take a moment to stop and ask ourselves what it is exactly that causes a torrid upward move? In short - what is the irrational exuberance trigger?

One theme that glows like beacon is future expectations. When investors look into the months and quarters ahead - seeing huge revenue and income potential, beyond where a company is now, many times, bulls jump into action and begin a massive buying spree. Then, when the stock starts to ascend and outperform the sector and market, the media jumps on the bandwagon, fueling the buying fire.

But we have to stop and ask ourselves: where is the point where future expectations become so unreasonable that the present market price simply doesn't support the massive future revenue and net income assumptions investors have placed in their bets? (For related reading on investor psychology, check out The Madness Of Crowds.)

Back to BPZ's Future
Looking at BPZ Resources, to reiterate, the stock is up over 100% for 2008, while also having run almost 500%, since the beginning of 2007. Much of the share price appreciation is due to Wall Street's expectations that the company will become profitable this year with 2008 EPS anticipated between 67-70 cents per share. In 2007, the company witnessed a 37-cent per-share loss, thus the move to profitability is obviously a huge coup in the company's history. What's more, looking forward to 2009, the company is expected to see earnings of $1.61 a share - a big gain for sure.

The problem is that, when you do the math, the forward price-earnings (P/E) ratio comes in just shy of 15 (earnings of $1.61 per share and current stock price of $24.10). It's true the industry average P/E for oil and gas is 23; however, Apache Oil (NYSE:APA) is trading with a P/E of 13.8; Anadarko Petroleum's (NYSE:APC) P/E is 15.37, and BP (NYSE:BP) currently has a P/E of 9.75. (To learn more, check out our P/E Ratio Tutorial.)

The reality of the situation is 2009 earnings are already priced into the stock, which also assumes that absolutely nothing will go wrong with the company before then. Wall Street has exuberantly run the stock through the roof, and now investors are hoping the company can produce another big oil find to sustain the price at current levels, thus providing incentive to move higher. But in the oil and gas business accidents and delays happen, something that could easily take a bite out of the company's expected profits. (To breeze through consensus estimates like the best Wall Street forecasters, read Strategies For Quarterly Earnings Season.)

Bottom Line
It's important to note that when exuberance begins to surface in a stock, investors become overwhelmingly emotionally tied to their trade and often have trouble seeing the reality of the situation.

BPZ Resources is an incredible company that has seen bold price growth over the last year, but buying here demands the company to come forward with blazing success over the next year and a half, while leaving virtually no room for error. Fact is, BPZ Resources isn't exuberant whatsoever, investors who blindly keep running the stock up are. Really, a little common sense goes a long way.

To learn more, read How Investors Often Cause The Market's Problems.

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