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Summary

  • The stock of CBI has plunged lately due to a report from Prescience Point, which accused CBI of manipulating its balance sheet.
  • In an almost identical case, Moody's stock plunged 20% in 2 days last year, but the news was soon forgotten and the stock has doubled since then.
  • The great growth potential of CBI, thanks to the energy boom, the endorsement of Buffett and the technical reaction of the stock, render the current situation an excellent opportunity.

The stock of Chicago Bridge & Iron (NYSE:CBI) plunged by 7% on Tuesday, as Prescience Point accused the company of manipulating its balance sheet by pronouncedly underestimating its losses from its Shaw acquisition. Prescience claimed that the real losses may result in the default of the company, and estimated the fair value of the company at $37, which is 50% lower than its stock price before the report of Prescience. The big question is whether there is indeed great downside for the stock, or the recent collapse is now presenting a great investing opportunity.

First of all, CBI is a well-managed company with a great growth record. The company has managed to increase 6-fold its earnings in the last 9 years, and has still ample room for growth, thanks to the boom in oil and gas drilling in the US. To be sure, analysts predict 20% growth in its earnings per share (EPS) this year and 16% next year. Even better, the greatest endorsement to the management is the 8.9% stake of Warren Buffett in the company, even though he is not fond of the industrial sector.

Investors should also evaluate the case of CBI based on their recent experience of similar cases, in which an "expert" caused the collapse of a solid stock with his comments. More specifically, when the Justice Department considered suing Moody's for defrauding investors last year, an analyst of BTIG Research claimed that the potential fee might put the existence of Moody's at risk and lead the stock price to zero. The news caused the stock price to plunge 20% in two days. However, the news was soon forgotten, and the stock has doubled since then, in less than 1.5 years. It is a great coincidence that Buffett was a major shareholder of Moody's as well. Of course, he was not scared by the prevailing panic, and he sold a part of his stake only a few months later at much higher prices (50% higher). He still possesses an 11.5% stake of the company.

Another vivid example is the Macondo accident of BP Plc (NYSE:BP). In the days shortly after the accident, some analysts claimed that the company might go bankrupt. However, although the spill has cost BP about $40 B, the company is continuously improving its shape, and has almost retrieved the market cap it possessed before the accident. The investors that were not scared by the "experts" and bought the stock after its 50% collapse have been greatly rewarded, and are now receiving a 10% dividend on their purchase price.

Finally, it is always helpful to evaluate the technical reaction, and particularly the trading volume of the stock, after a disastrous piece of news. First of all, it is remarkable that the stock of CBI had already declined 10% on triple volume (compared to the average 3-month volume) before the report of Prescience, thus proving that the report had "leaked". On the day of the report, many shareholders were caught off-guard, thus resulting in the 7% plunge of the stock with a volume 14 times the average and about 12% of the total number of the existing shares!

In my opinion, it is a classic example of irrational, panic-selling. As the stock gained 2% on the next day on almost equally high volume (10 times the average), I believe that the dust is settling and the stock will return to its pre-news level of about $85 (21% up from its current price) when the daily volume normalizes. As the daily volume begins to converge to the average of about 1 M shares per day, investors can safely conclude that all the scared shareholders have gone to the sidelines and only the strong hands have remained on the table, thus ensuring for a great advance of the stock price based on its solid fundamentals.

In the current bull market, which seems fully valued at its all-time highs, investors should grasp the rare opportunities that arise, such as the one described above. They should also remember that the greatest opportunities emerge at the point of maximum fear, as described in a previous article. The solid fundamentals of CBI, its exceptional growth potential and the endorsement of Buffett greatly outweigh the opinion of Prescience Point.

Source: Chicago Bridge & Iron: Why You Should Grasp This Rare Opportunity