It's amazing how a little publicity and $90-a-barrel oil can help a stock go from "bad to less bad."
This was just after BP's Gulf of Mexico debacle... which decimated
the entire offshore oil drilling sector. Even drillers with little
exposure to the U.S. drilling market lost as much as 33% of their market
value. Some lost more than 50% of their market value.
The average investor couldn't stand the thought of owning shares of
a company like Ensco. Most people believed things couldn't get any
worse for the sector.
As a resource investor, when I hear "things can't get any worse,"
I'm almost always ready to buy. You see, when things can't get any
worse, they can only get better. This is what the contrarian Einhorn saw
in Ensco last summer.
As you can see, it was a heck of a call. Things have gone from "bad
to less bad" in the drilling sector. The Gulf of Mexico accident wasn't
nearly as awful as the press made it out to be. Crude oil has moved
from the $75 per barrel to $90 per barrel. And Ensco has soared 35%
since July...
The story behind this huge gain is one of the great secrets of stock trading... the phenomenon my colleague Steve Sjuggerud calls "going from bad to less bad."
You don't make the biggest post-crisis stock gains when good news starts appearing. You make it while things still look terrible...
when most folks still think things "can't get any worse." This is when
things get ridiculously cheap... this when the risk gets "wrung" out of
the market.
When things get just a little bit better, a beaten-down stock with great fundamentals is like a coiled spring being released.
You're not going to find coiled springs by waiting on good news.
Let price and value be your guide. When you find a hated asset that
offers great value, just wait for the trend to reverse.
This value-focused "bad to less bad" approached worked for Ensco.
It has worked for a hundred years. It will work for a hundred more.
Good investing,
Matt Badiali