When 'Bad' Energy Companies Make for Good Trades
It's a bit of trading knowledge that can help investors identify stocks where even if the long-term outlook is promising, short-term management mistakes offer trading opportunities.
A stock goes down because it messed up so much, and that presents an opportunity to ride it back up. Often, though -- and this is key -- it's riding that stock back up before it goes back down again because management messes up yet again. Positive headlines are magnified, but so are the negative ones.
In the energy sector, there are plenty of examples of this "bad" company trading phenomenon. Take Weatherford International (WFT) , which a year ago announced that it might have to restate years of financial statements because it messed up its tax status. Weatherford sank so low by the time the market bottomed out last October that it's up 25% since -- though its shares are down 30% in the past year.
|It's a law of the markets: 'bad' companies often make the best trades|
This week, Weatherford announced that it couldn't announce its fourth-quarter results because it still doesn't have a handle on its accounting mess a year later, and shares sold off. It takes time to untangle a mess of this magnitude with financial statements all the way back to 2008 impacted. However, it means that the best way to play the stock is by asking the question, Will the next short-term trigger be up or down? .
Chesapeake Energy (CHK) , which is the poster child for the exploration and production levered balance sheet, continues to be a very murky story long-term.
Yet it's steady stream of self-promoting press releases intended to combat both investor and sell-side criticism have made this "bad" company a great trade at any given time. Chesapeake shares are up close to 10% this year, while being down 28% in the past year.
With plans to monetize as much as $12 billion in assets this year, investors can expect that Chesapeake will be setting up its shares for some more short-term spikes -- last year shares rose as high as $35, while the shares are currently trading below $25. Consider that Chesapeake rallied early in 2012 on the announcement of a joint venture in the Utica shale region that it had already announced last November.
Chesapeake's 200-day moving average is $26. It is the only of these three "bad" company energy stocks that is not currently trading above its 200-day moving average.
Transocean fits this bad company/good trade bill to a tee. The company reported woeful results in the third quarter that missed consensus by 72 cents. That's about as big as a miss gets. Transocean ratcheted up debt in acquiring Aker Drilling, diluted shareholders by issuing equity at a time when its shares were at a multi-year low, and was put on negative credit watch with the risk of being moved down to junk by the rating agencies, all in one quarter. So far in 2012, the shares are up 30%, but the stock is actually down nearly 40% from year-ago levels.