US Markets Continue to Savage Oil Service Stocks

Even in the oil services world, the US [Gulf] markets are laggards. We seem to be screwing up every company, even in the best sectors. Smith International (SII) is selling off today on "record earnings" (but missing estimates) and weakness in the US markets contributed to not so great margins while also hurting near term guidance. 2009 should be a good year for this name, but with the market of an attention span of a four year old, 2009 might as well be 2019.

This is not a major position at 1.3% of the fund, and I was considering dropping it even further going into earnings, but since I was sitting on a quick loss in this position (bought in low $70s) I didn't want to sell. But once again, a lesson that the market teaches you over and over. Better to take a loss many times, than wait and hope. Now I have a more meaningful loss as the stock is down 9% today.

I'll probably exit this position wholesale if we get a decent bounce back to $60 because the specter of "weak US offshore" is going to hang over many names in this sector. I've tried to focus on more internationally focused names both in drilling and oil services, but the US weakness taints almost everything. So there is no escaping it.

I am going to use this opportunity to cut back on National Oilwell Varco (NOV) which is also a 1.3% position - before its earnings. I'm sure they will have an issue with the US as well. (who doesn't?) It's chart looks like Smith International's did 24 hours ago. So I want to take the sale when I can, better here at $65 than when it was $55 last week.... there really is no safe harbor out there. I have 225 shares, I am going to cut it back to 100 shares (selling 125) and then just keep it tucked away in some dark corner of the portfolio.

If it sells off post earnings, well it is not a major part of the portfolio at that point. I still like this sector (oil services) but finding something totally not affiliated with the US is hard to do. Again, it is treacherous to be holding anything into earnings right now, and anything associated with the USA land, air, or sea - is causing pain. Unless your a homebuilder or financial of course since the Fed cuts fix everything. Or so the Kool Aid says.

These things are getting very cheap, Smith International now is trading at less than 15x 2008 estimates, but again - the market doesn't care about value and continues to selloff anything with any strength due to "disappointment." Why not buy "cheap" stocks? Well "cheap" stocks can remain so for many quarters... or years.

This is what value investors do - they buy, and sit for however long until the market favors their stocks again. Eventually they are right but it could be two months, two quarters, two years or five years. And in between now and whenever "then" is, a lot of opportunity cost is lost. It is not a "right" or "wrong" strategy - good investors of all types of strategy can make money over the long run. But just not my cup of tea (mostly).

Trina Solar (TSL) is a great example of a value stock - based on all perceptions of value, it's cheap. Within the solar sector it looks even cheaper. Yet it does nothing month after month, but lose money for investors. One day it will probably make a 40% move in one week. But from what level? Those who bought in the $50s and $60s would not even break even if it made a 40% move from today's levels. That's the problem with value investing - you need to time your entries well even in that style of investing or you are doomed to lose money. Having a portfolio of 50 Trina Solars just seems like an exercise in frustration. Even having 3-4 of them hurts performance.

We want the money working for us now, in things that will be working in the coming few months - trying to find relative strength. I see a lot of good values in many sectors now - many considered growth sectors in fact. But that does not mean those stocks won't trade in a listless 10-15% narrow band for months or quarters to come. When their technical conditions improve, this will mean buyers (the big time buyers in the market) are once again interested in these names, and that's when I will return in larger scale to these names/sectors.

I don't want a portfolio full of listless names, that can drift sideways or downs for quarters on end, waiting for the eventual day that the stocks bounce 30% in a week (that's what people who bought financials, homebuilders, and retailers have been doing the past six months) Eventually you will be "right" but off of what level? Usually a far far far lower level than you entered the stock. So you are just paring losses and wasting a lot of time, nothing else.

I said the exact same thing for CNH Global (CNH) [Closing Last of CNH Global]- it was cheap before earnings... it got a whole lot cheaper after earnings... and it still is cheap. Who knows how much longer it will remain "cheap"? Maybe one more week? one month? oneyear? Until the market deems it's going to recognize "value," I don't see a need to sit there waiting for the market to come to it's senses. By the time it does, the stock could be far "cheaper" than it is today, which means by holding it, we lost even more money. Refiners, another group that was "cheap" for months on end... only to become more cheap by the week (losing investors money).

What appears to be happening is the same correction that took 60-80% off many retail, financial, and homebuilder stocks will now happen to most other sectors... because.... "well that's how it is". Sense has no room in the market in the near term and multiples are contracting across the board. At some point this will reverse and people will wake up and say "wow these things are darn cheap".... but until then these are just buoys in a rough sea, directionless and without any group of buyers willing to come to the rescue.

Smith International earnings

• Smith International Inc (SII) on Tuesday reported a 17 percent increase in its fourth-quarter profit, but the results fell short of Wall Street expectations sending the oilfield services company's shares down 11 percent.
• Flooding in Mexico and a drop in the number of rigs working in shallow waters in the U.S. Gulf of Mexico are among the factors that weighed on the Houston company's profit margins.
• The company said its fourth-quarter net income rose to $167.0 million, or 83 cents per share, from $143.0 million, or 71 cents per share in the year-ago quarter. Revenue rose to $2.3 billion from $2.0 billion.
• Analysts surveyed on average had expected a profit of 88 cents per share, according to Reuters Estimates.
• Chief Executive Officer Doug Rock said in a statement that $3.70 to $3.80 per share would be a "reasonable" expectation for earnings in 2008. For 2008, Wall Street had expected a 2008 profit of $4.00 a share, according to Reuters estimates.

Disclosure: Long Smith International, Trina Solar, and National Oilwell Varco in fund; no personal position