There’s an old Wall Street joke.
What do you call a stock that’s down 95%?
A stock that falls 50% after already dropping 90%.
Granted, we’re using the term “joke” loosely here. But there’s an important point behind this.
A stock down 80%, 90%, or even 99% doesn’t necessarily make a great buy.
In fact, there are ample studies which show these are usually the worst stocks to buy.
However, a huge loser can highlight a sector that’s hitting bottom and has a few great buys in it.
So today we’ll review one massive lose we’ve been following closely and an indirect way to profit from it.
A Canary In The Coal Mine?
Our coverage of agriculture stocks last week was a primer on something we thought was going to be a big opportunity.
After years of steady losses, it looked like the final holders -- the misguided “people gotta eat” holders -- were finally capitulating and everything in the sector was hitting new lows.
Many signs pointed to the excruciatingly long deflation of the agriculture bubble was ending and it was time to move.
A week later, it’s clear we spoke too soon and that’s a good thing for you and me.
You see, this week brought what looks like the final capitulation in agriculture stocks.
You know capitulation.
It’s when a stock or sector finally reaches the point when the last of the buy-and-hopers can’t take the pain anymore.
They sell out en masse.
Stock prices crash. Those stocks which are down 90% fall another 50%.
And the cycle begins anew.
The indicator of the capitulation point in the agriculture stocks is looking like fertilizer mining company Intrepid Potash (IPI).
It had everything going against it.
Fertilizer prices are dropping. The mines which produce the raw ingredients for fertilizer -- potash, nitrates, and phosphates -- are shutting down.
The stock was down massively. It traded for $68 a share in 2008 at the height of the agriculture bubble. It slid to just around $2 a share a week ago.
Earnings were dropping steadily. Net earnings dropped each quarter for four straight quarters to the point it was losing money each quarter.
And, perhaps most importantly, sentiment was extremely bearish.
Analysts were cutting revenue and earnings forecasts for the stock. Each month or so another analyst would up how much they expected Intrepid to lose next quarter and next year.
Wall Street’s official ratings were especially bearish too.
You know it’s rare to see a sell rating on a stock. Something like 96% of all analyst ratings are “Hold” or “Buy.” Only 3% or 4% of ratings are “Sell”.
Well, Intrepid had 11 analysts officially covering the stock. Five of them had “Sell” ratings on it.
Again, everything was going against it.
I honestly liked it for all those reasons too. But I wanted to wait until earnings came out because it just makes sense to wait. Stocks may go up 3% to 5% on a good report. They can drop 10% to 20% on a bad report.
I’m glad I did wait too.
Intrepid missed already reduced expectations for revenues and earnings.
It is so bad Intrepid’s auditors raised official doubts about whether the company can remain a “going concern.”
That was bad. Which is good.
But it got worse. And that could be great.
If You Want To Sell High...
Intrepid shares fell 60% over the two trading days after the earnings announcement.
The stock, already down to $2 from $68, was cut in half again.
It was still trading below $1 yesterday.
Intrepid Potash has become one of the “what do you call a stock down 95%” punchlines and that presents a unique opportunity.
Now, let me be clear. I’m not recommending Intrepid Potash. Not even close. There’s a lot of debt, financing deals, and the very real shot it could get much worse.
I am, however, using Intrepid as an example of how bad things have gotten in agriculture stocks.
Everything that could go wrong for this sector has gone wrong. It went from bad, to worse, to terrible.
That means in three to five years from now, there will likely be more than a few 100%, 200%, and larger winners in this sector.
If you are looking to buy low and sell high, agriculture stocks are not just low, they’re previously unparalleled low.