Why I'm Closing Atwood Oceanics

Atwood Oceanics (ATW) is an oil driller which now trades at 11x Sep 2008 earnings of $3.30 and 7x the estimate for 2009 ($5.32). However the market sees this as a vastly inferior stock to, say, companies that don't make any money but the hope is by 2010 they can. One day we'll look the charts and laugh that we sold this in the $36s... how outrageous. How stupid. That is the best time to buy, we'll say! But much like the financials 90 days ago, there is now relentless selling pressure and even if you "buy in" a few days too early from the ultimate bottom (I know because I took some major pain buying Ultra Financial (UYG) literally 2 days too early) you take a lot of pain.

Right now until these hedge funds completely get clocked, emptied out, closed down - whatever they need to do, fundamentals continue to not matter. Readers will know I've been typing that for many months now. Either we are trading on hopes/dreams (economic recovery in "6 months") or "guess what hedge fund is being forced to sell nonstop and which positions". I prefer not to trade on hopes that I do not believe in, nor can I guess when the hedge funds finally empty their holster. Even though I am quite clear that when we look back a year from now, we'll look at a chart and say "my gosh people were selling ABC fertilizer stock for 5x 09 estimates? This coal stock was sold at 4x 09?? Why?" And we'll forgot the current environment.

On a fundamental basis there are cheap stocks hanging out all over the place. Buying these cheap stocks only is losing us money day after day. So for now we'll trade the "dream stocks" (housing/retail) on pullbacks since all that matters in the market now is enough hedge funds chasing a sector, no matter how wrong the thesis. Just like they chased into technology 60-70 days and drove those stocks up for no good reason. So now they are doing in the hopes/dream stocks - because as we all know as gasoline drops and we get another $15 a week in our pockets, homes, autos, clothing, et al will start selling like hot cakes. But only in the U.S., as the rest of the world will be immune to the benefits of lower oil prices. So says HAL 9000.

We started Atwood Oceanics in October 2007 and once had a mighty gain. That gain had its teeth kicked in and we exit with a $2200 loss, selling our 1.2% position. It has now made a COMPLETE round trip from where it was a year ago. Oil was in the $60s/$70s when I bought it - now its a full 50% higher yet the stock is lower. As I hear Republicans throughout the land cheer "drill baby drill". This is the market of illogic. Until we can use logic on a sustained basis the market is simply unbuyable. Again, I repeat, we'll look back at the chart in 1 year and say "why the heck were you selling at $36??" Answer: If a stock can trade at 11x estimates for 30% growth, it can trade at 8x, or 5x, or 2x earnings for 30% growth. Once the hedge funds abandon you, I guess there is no hope in this market. Off to find another homebuilder to buy! :)

At some point in the next week or two, much like financials in 1st half 2008 I expect this complex to gain 15-20% in 2 days across the board. People will moan and say "why didn't I buy! It was so clear the bottom is in!" That is so easy to say in theory, but in reality unless you time it well, you will just be making up losses. It is very easy to forget the "reality" of the past 2 days when the stocks reverse and put on those huge oversold rallies.

And away we go... Pulte Homes (PHM) or Toll Brothers (TOL), come to papa!

PS: What do you get for $200 Billion, a move to socialism, dumping losses on taxpayers, and a huge potential increase in the federal deficit? A 0.1% net gain in the S&P in the past 36 hours. The government is trying to do its best to buy a rally but each iteration of bailout/surprise fed cuts/new Federal Reserve tactics is having less and less of an effect. Sort of like a drug addict ... each hit has less of an effect. Boo Yah.

Disclosure: Long Ultra Financial in fund; no personal position

Comments

[Brian Pursley:]

So you just piggyback whatever trades the latest hedge fund blow ups are liquidating at the moment? Nice strategy. What will you do when they are gone?

2008 Sep 10 01:21 PM

[Emerald:]

This is a grat strategy if you ae looking to lock in losses on real money and create tax losses. Overtrading will make you poor. Stick with companies that are financially sound and in growth businesses like drillers.

2008 Sep 10 02:48 PM

[usc76:]

Great article - made sense to me. First time I have seen someone identify a cause and effect on the current market. I would suggest that if there is merit to this article that hedge funds be outlawed as this is market manipulation that is no different than insider trading. In the long run, the markets are damaged by these funds and the only people making money for the most part are the managers of these funds. I guess there may be some hedge funds that have worked out for for investors on the "in".

2008 Sep 10 03:17 PM

[searcher:]

"...outlawed.."? How many times at so many market junctures causing pain (and gain for others) do we hear this? If every entity or activity that has been targeted for the docket over the last 40+ years had been 'outlawed' there would be no market. Maybe that would be a good thing, as we could have just and rational prices set by compassionate experts elected or appointed by our elect. You think?

2008 Sep 11 12:18 PM

[je:]

The OIH willbe at $95 by mid Oct. The XHB will probably form the right shoulder during the LEH bust and finishing back to the neckline by mid Jan with a $33. price target -May_June.........

2008 Sep 11 02:08 PM

[RDR:]

My sentiments exactly. Very well stated. Thank you.

2008 Sep 12 05:46 AM

[RDR:]

Altho I should add that one of the reasons I follow your essays is that you and I think alike. We apparently are investors. Traders (and your moniker is "Trader Mark") usually set closer sell stops (like the 7% rule used by William O'Niel and his followers). But you (and I) unfortunately hung onto these stocks when clearly the market had lost favor with them. Value is set by the market. Yesterday on the Bill Cara website I had a brief discussion about an artist currently featured in this week's Time Magazine. Damien Hurst is the "artist" who placed diamonds on a human skull and attempted to sell it for over $100 million. That didn't sell, but, if you prefer, at his auction next week (where he is expected to make over $120 million) he offers "The Golden Calf" which is expected to sell for between $14.6M and $22M. This "art" is (from Time Magazine) "a white bullock preserved in a tank of formaldehyde that's mounted on a tall marble plinth. His hooves and horns are 18-karat gold. His head is crowned by a gold Egyptian solar disk....The Golden Calf is a nimble concoction, designed all at once to beguile, flatter and parody the big-swinging billionaires who are likely to bid on it."
The value of the above "art" to me is the gold less the cost of disposal of the dead animal and toxic formaldehyde. The value of our oil stocks are likewise set by factors clearly not rational. On the other hand, it is sheer marketing genius to create such "art" and convince someone to buy it for $20M. To me, that ranks up there with some of the greatest stock frauds in history. Remember Bre-X Minerals?

2008 Sep 12 06:16 AM

[Alphameister:]

I understand the frustration, but selling a deeply undervalued stock at a time when it is deeply oversold is not sound trading. It's love turning to hate at exactly the wrong time. It didn't take a year to make the move look bad, only a couple of days.

2008 Sep 12 01:24 PM

[grider:]

Seems like your chasing someone....why don't you stick to your own original judgement when you purchased the stock (unless your were also chasing someone back then as well).

Ask yourself, did anything change fundamentally? IMO the picture for ATW is looking brighter everyday! Over 50% of 2010's earnings are locked in...with upside in repricing and new builds for 2009 & 2010.

STOP following and start leading!

2008 Sep 12 07:51 PM