Fundamental analysis is only half the battle. One of the thorny aspects of investing is that even after performing the greatest due diligence in the world and thinking a stock is an absolute steal at a certain price, a stock, for a variety of reasons, can continue to sell off in a major way. Even for long-term investors, a major sell-off soon after purchasing a stock can drastically reduce annual returns, even over a very long period of time. Another facet of investing that can confuse investors is when a stock bottoms in price at times the fundamentals couldn't look worse or when a stock tops out in price at times the fundamentals couldn't look better.
Yet another tricky aspect of investing can include picking the right stock within an industry. You might read scores of wonderfully researched analyses that indicate you should be buying certain stocks within an industry and avoiding others only to find out that the market already knew that and priced it in way before you got involved.
One of the ways I attempt to avoid some of the difficulties outlined above is by making use of charts. Perhaps you've heard the phrase, "Charts don't lie, people do." Charts of stock prices help to illustrate the collective thinking and/or the collective action of the market. They help tell the story of a stock, an industry, and the market as a whole. When I've done my homework on an industry and have a couple stocks in mind I'm interested in possibly purchasing, one of things I like to do with the charts is to look at relative performance. How companies are trading relative to one another can provide clues as to which companies are being favored by investors. Especially during steep sell-offs, relative performance can be beneficial, as it often helps indicate which stocks are less inclined to go lower and which stocks are more inclined to go higher when the time is right.
At this time, I would like to present one stock that has gotten absolutely crushed over the past year but recently began to quietly outperform two of its larger competitors, against whom it is often compared in financial writings. The company is Baker Hughes (BHI), the oilfield service company with more than 58,000 employees in more than 80 countries.
Last summer, Baker Hughes was flying high. The stock reached $80.995 on July 26, more than triple its low from December 2008. All of a sudden, things changed very quickly, and the stock began to nosedive, reaching $57.30 by August 8. It eventually made its way to a 52-week low of $39.40 on April 10, 2012. On the day Baker Hughes reached its 52-week low, the same day the S&P 500 (SPY) found its April bottom, the Market Vectors Oil Services ETF (OIH) traded as low as $38.30. At the time this article was written, OIH traded at $36.25, down 5.35% from its April 10 low. Baker Hughes, on the other hand, stood at $40.96, up 3.96% from its April 10 low.
As of May 14, 2012, Baker Hughes was the fourth largest holding in OIH. The top two holdings belong to Schlumberger (SLB) and Halliburton (HAL). Schlumberger and Halliburton as well as OIH are outperforming Baker Hughes year-to-date. Schlumberger is down 4.08%, and Halliburton is down 11.39%. OIH is down 5.34%. Baker Hughes, on the other hand, is down 15.79%. Furthermore, over the past year, Schlumberger is down 20.28%, and Halliburton is down 32.69%, versus Baker Hughes' 40.44% decline.
While Baker Hughes has been the underperformer when compared to its popular industry ETF as well as its two larger competitors, since its April 10 low, things have changed. As I previously mentioned, Baker Hughes is solidly beating OIH since April 10, outperforming by 931 basis points. With regard to Schlumberger and Halliburton, both are recently trading below their April 10 lows, down 1.40% and 3.29% respectively. Baker Hughes is up 3.96% since that time. In fact, Baker Hughes is also handily outperforming the S&P 500, which is down 1.97% since its April 10 low.
To even further illustrate the outperformance of Baker Hughes relative to the other companies included in the top 10 holdings of OIH, at the time this article was written, only one of the top 10 (besides BHI) was trading above its April 10 low. That stock, belonging to Seadrill (SDRL), actually did break those lows in recent days but is now barely holding on, up 0.84% since it traded $35.65 on April 10.
Perhaps you are thinking the recent outperformance from Baker Hughes should be no surprise given it is down much more than its larger competitors year-to-date. If you are inclined to think in that way, I would caution that in general, there is no hard-and-fast rule that underperformers must become outperformers. The worst performing stock in an industry can easily remain the worst performer until the industry as a whole turns around. Even then, it could lag on the upside as well. But, that's not what is happening to Baker Hughes over the past month.
Something in the investment community's thesis on Baker Hughes has changed. Perhaps it's as simple as the company-specific bad news is all priced in and major investors now find value in the stock relative to its peers. Does this mean the stock can only go higher from here? The answer is definitely no. If the major market indices continue selling off, they will exert downward pressure on Baker Hughes as well as the rest of the universe of stocks. However, if the relative outperformance of the past month is something that indicates a change in investors' mindsets towards Baker Hughes, then I would expect it to perform quite well relative to its peers going forward.
So what's the moral of this story? From a relative perspective, Baker Hughes is the stock that seems to be in favor over the past month as compared with its peers. If you are interested in trading the stock, buying in this general region with a stop loss slightly below $39.40 is worth a shot. Given the way the market is treating this company relative to its peers over the past month, for the long-term investor interested in some of the oil services names but unsure which one to go after first and at which price is a good entry point, putting on a partial position in Baker Hughes at these levels makes sense. Save some dry powder in case the overall market drags Baker Hughes lower and it joins its peers in breaking its April 10 low. And, over the next couple months, when deciding the points at which to build the partial position into a full position, continue checking the relative performance of BHI to its peers.
Through relative performance, market participants are telling other investors their preferences. While not a foolproof strategy, assessing relative performance, whether by comparing a company's stock to a peer or to the market as a whole, can help investors gain a bit of an edge by better timing entry points and by helping to figure out when certain news is priced into a stock.
Disclosure: I am long BHI.