Investment Update – $RIG: Selling Stock for a Small Loss

by Enis July 10, 2014 3:23 pm • Commentary

We have waited patiently in our long RIG stock position since initiating back in late January, buying RIG for $45.15.  We almost got stopped out of the position in mid-March when RIG approached the 5 year low of $38.21, but the stock promptly bounced from there.

We have given the stock a chance to move above the long-term resistance area of $44 over the past month, but the stock’s failure to do so has led us to take a small loss on our long RIG position this morning.  Today’s move lower has RIG perched right on its 50 day moving average, and a break below could lead to more severe selling if the broader market starts to sell off as well:

RIG daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
RIG daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

RIG is only the second position in our investment portfolio that we closed at a loss.  That is partly due to the fact that the wind has been at the back of long positions throughout the past 9 months, but also because we have been extremely picky about good entries for our positions to give ourselves enough room to takes some initial pain in anticipation of a larger eventual bounce.

In any case, we’ll sell RIG here, which still looks cheap fundamentally, but sick technically.  There are better potential opportunities in my opinion.  We remain on the lookout for good long-term investment positions, but are unlikely to initiate anything new unless stocks go on bigger sales (meaning a larger market correction).

Action:  Sell to Close RIG at $43.24 for a $1.91 loss (or about 4%)


Original Post, January 23, 2014 – New Investment:  Don’t Get Drilled

Here’s the latest addition to our investment portfolio:

We discussed RIG in detail on a couple occasions in the past 2 months.  First, I laid out some of the reasons for the severe underperformance of RIG stock over the past five years (flat in a very strong market) in a Deep Dive post on Dec. 6th.  We expanded on the RIG thesis in a Name that Trade post on Jan. 3rd, discussing the idea of a long RIG / short oil pair trade.

Well, RIG caught our attention today as it has neared its 1 year low (which is at $44.19) after being downgraded this morning by two separate analysts.  With the thought that this could be a potential buying opportunity, we went back to review our prior posts.  This was my takeaway from that Deep Dive post last month:

Even as earnings have totally disappointed over the last 5 years, investors have been willing to pay for the underlying asset value of Transocean as a company.  That has really been the floor in terms of valuation from an investor perspective.  The fact that the P/B ratio is still near 1 implies quite limited downside for the stock.  If the company can improve its earnings power, then expect strong stock appreciation.  But even if operations don’t immediately improve, an investor in RIG is likely risking only 20-30% (based on book value) for a potential 50-100% return over the next couple years.

RIG is an interesting value investment here based on fundamental metrics and Icahn’s involvement.  The key risk to me is a potential decline in oil prices to levels where offshore projects become unprofitable.  Barring that, the risk/reward for a stock like RIG is skewed to the upside, after the woes it has experienced since that 2010 disaster.  We’ll keep our eye on this one on the long side – piggybacking off of Carl Icahn has been a rather profitable affair for good reason.

With today’s decline, RIG is now trading at book value, so the skewed upside vs. downside scenario seems even more relevant today than it was last month.  Moreover, crude oil prices have actually held up ok even with the start of tapering in December.  Finally, Carl Icahn is likely going to continue to push management to unlock shareholder value, whether in the form of asset sales or the return of cash.  Considering the already cheap fundamental valuation, other deep pocketed value investors could be circling as well.

We’ll take the opportunity to add a simple long stock position to our investment portfolio today.

TRADE: Bought RIG for $45.15

Earnings are in late February.  We might provide an update to the position before then if we decide to do any protection or leverage structures in the options ahead of earnings.