Magnum Hunter Resources Corporation (MHR) shares have plunged in the past few weeks and the rate of decline might have been too far, too fast. This stock has been under pressure due to a wide variety of issues, which range from a drop in the price of oil, weak markets over European debt concerns, and even company-specific issues which include a recent secondary offering of shares at $4.50 each. In late February, Magnum Hunter shares topped out around $7.50, and have since dropped to nearly half that level. While almost all the recent news has not been great, this stock could be close to bottoming out and investors should begin to consider buying in stages on any further dips for these reasons:
1) The markets and oil stocks in particular are oversold. The rate of decline is starting to get alarming and when things have started to look this ugly in the past, we have seen the Federal Reserve and other central banks step in to save the system. Given a choice between printing more money and a possible global depression, I think it safe to assume that when push comes to shove, a coordinated effort will be made to print money and lower rates even further. The markets and certain stocks are compressed like coiled-springs now, and a significant risk-on and short covering rally could occur.
2) Magnum Hunter shares are heavily shorted and the stock could be poised for a relief and a short covering rally. On an average day, there are about 3.5 million shares traded. According to Shortsqueeze.com, there are nearly 30 million shares short right now. Based on the average daily volume, it could take about 9 days worth of volume for shorts to cover. With a nice profit in-hand for most shorts, many of them could be looking to take profits and cover their positions, especially if the stock shows any signs of strength.
3) The growth story at Magnum Hunter continues and with projects located in the Marcellus and Eagle Ford Shale areas, the stock is starting to appear cheap. The company recently announced a secondary offering of 35 million shares to investors. These shares were priced at $4.50, and with the stock now at just $3.77, investors have a chance to buy for much less.
Key Data Points For Magnum Hunter From Yahoo Finance:
- Current Share Price: $3.77
- 52-Week Range: $2.33 to $7.90
- Dividend: none
- 2012 Earnings Estimate: 4 cents per share
- 2013 Earnings Estimate: 30 cents per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.