This is making me incredibly nervous.
Have you noticed oil sentiment has changed completely?
All hope is lost. It only took 15 months of steady declines to get rid of it.
Now everyone sees, reports on, and accepts the tough reality ahead for oil.
Take this note from BMI Research. It says, “What is underway [in oil] now is a structural market rebalancing in which low oil prices clear out high cost production - a relatively small part of which is U.S. shale. It is not the result of OPEC policy, but of the basics of supply and demand.”
It’s like they just stumbled across a Profit Alert Daily article from 14 months ago and rewrote it.
Complimentary, sure. Thanks to them. But here’s the thing, all this actually has me worried and could mean the beginning of a quick and sizeable opportunity.
Here’s what I mean.
Love The Hate
Everyone now agrees oil prices will stay low and could go much lower.
Does $30 oil sound extreme right now?
Not at all. Pretty reasonable, actually.
Two years ago though -- when oil was in it’s third year in the $90 to $100 range -- $30 oil was inconceivable to most.
That’s all changed and is why it may be soon time to buy oil again.
The reason is because what’s happening in oil now is precisely the opposite of a very familiar and lucrative experience your editor had in the past.
I spent the last few days looking for potential stocks to buy.
One of the best places to start looking -- as you should expect as a reader of these pages -- is at a list of stocks with “Sell” ratings on them.
When I was reviewing that list one stock stood out to me that’s particularly useful in helping to identify when to buy and sell a stock and may be even a good buy now.
The stock was Potash Corp (POT).
Potash Corp is a leading fertilizer company. It mines all the major ingredients used to make fertilizer. It has a huge barrier to entry (the upfront capital cost on a potash mine is well over $1 billion). And it was an absolute darling of the commodities bull from 2003 to 2008.
Seeing it among the “Sell” recommendations was surprising for two reasons.
First, I honestly haven’t looked at the stock in years.
The agriculture bubble burst in 2008. It was reinflated somewhat between 2009 and 2012. But long experience tells me to just walk away after the bubble bursts. Years of hope, frustration, and progressively lower “dips” are ahead.
Second, it was downgraded to a “Strong Sell” by Zacks Investment Research. Not a “Sell.” A “Strong Sell.”
If you follow Wall Street analysts, you know a “Sell” is a buy. A “Strong Sell” though is as close to easy money you’ll ever find.
What an amazing turn for this stock. Let me take you back there for a moment.
As you may know, your editor was in the agriculture boom early on. Taking one one third of a the annual corn crop and burning it had only one logical conclusion.
What I’m far more proud of -- and learned a lot more from -- was catching the exact top in the ag bubble too.
Back in the summer of 2008 fertilizer stocks, including Potash Corp, were raging. Their earnings were soaring. Earnings forecasts were rising even faster. Every analyst had a “Buy” or “Strong Buy” rating.
Everyone was in…
And the pain was about to begin.
I wrote at the time of the clear warning signs the run was over:
Potash Corporation (POT), which has gained a cult-like shareholder base, reported its latest earnings on July 24th.
The results were great. POT tripled its profits, revenues soared 94%, beat already fairly high estimates by 8%, and it raised guidance for the rest of the year.
Could it have been any better? Probably not.
But the shares slid from $210 to about $180 today adding to the decline from the June high of $240. That’s a pretty hefty total 25% correction from the top.
That’s a recipe for disaster.
When a company releases great news and it’s stock drops, you know expectations are too high.
A huge warning sign right there, but not the only one:
Frankly, the huge run [in fertilizer stocks] is all just a bit too much. It seemed like a bubble was forming.
Everyone was talking fertilizer. CNBC was filled with nothing but Potash experts. Corn, wheat, rice, was all moving up.
It couldn’t last, but I was waiting for a sign.
That sign was when Potash Corp had a bigger market cap than Citigroup (C).
Sure, Citigroup has its problems that I’m not going to go into here, but Potash Corp more valuable than Citigroup?
Remember, this was a time when the markets were still descending into the credit crisis.
It was a lonely position to take at the time. But if I had any doubt, they were quickly allayed by the comments I received from that research.
Here’s one particularly confident comment. See if you can see what I mean:
Anyone really believes the commodity run is over, guess again. Population growth will drive food,oil,etc. When the world's population starts to decline,then I might be a believer. Economic slowdowns will occur, but growth is inevitable.
Wow. Just wow.
It gets worse:
Um, maybe because if [Andrew Mickey] checked the actual balance sheets and earning reports he’d realize that you have to have earnings to have a P/E.
Citigroup has no P/E. All the fertilizer companies are worth more than Citigroup. My local pub is worth more than Citigroup.
Citigroup has lost $1.79/ share over the last 3 quarters. That means they MUST make $1.79 in the next quarter just to break even. The forecast for the next quarter (Sept 08) is ummm...0.13/ share.
There are many more just like those.
They were relentless. But they also confirmed market expectations are still too high.
The chart below of Potash Corp over the last ten years showed exactly what happened after the top of the bubble and commenters acted like I insulted their children:
That’s one of the greatest trades ever.
Not for the size. I mean, the gains were huge across the entire sector.
It was actually a great trade because all the warning signs were there at the end and it was all entirely predictable
That’s why I’m so worried right now about oil rebounding and missing out on it.
Hitting the Cycle
It’s been a lonely, uphill run explaining to people why oil prices were too high for so long.
Loneliness, when investing, is good though. You have to learn to enjoy it.
Right now, it’s not so lonely anymore in oil.
That has me really concerned the oil drop may be over sooner than we thought.
Aside from oil though, these examples help illustrate the massive cycles all financial assets go through over and over again. How most people extrapolate whatever is happening right now indefinitely into the future. And, most importantly, how to profit from it all too.
Go back to fertilizer and bank stocks in 2008.
Fertilizer stocks have since collapsed. Potash Corp is down 75% and is now worth $17 billion.
Banks, meanwhile, have soared. Citigroup, which was worth less than Potash Corp when I was ridiculed for making the comparison, is now worth $160 billion. That’s about ten times more than Potash Corp today.
Those are huge, profitable, and predictable swings.
After Thanksgiving I’ll show you specifically how to take advantage of these cycles, more of what to look for at the bottoms and the tops, and show you how you can use them to double your returns.