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How to Reliably Find Safe Stocks Poised to Skyrocket

By Matt Badiali, editor, S&A Resource Report
Monday, January 17, 2011

It's amazing how a little publicity and $90-a-barrel oil can help a stock go from "bad to less bad."
 
Back in July, I told you how outstanding investor David Einhorn had picked up shares of offshore drilling outfit Ensco (ESV). The stock was trading for around $40 at the time.
 
This was just after BP's Gulf of Mexico debacle... which decimated the entire offshore oil drilling sector. Even drillers with little exposure to the U.S. drilling market lost as much as 33% of their market value. Some lost more than 50% of their market value.
 
The average investor couldn't stand the thought of owning shares of a company like Ensco. Most people believed things couldn't get any worse for the sector.
 
As a resource investor, when I hear "things can't get any worse," I'm almost always ready to buy. You see, when things can't get any worse, they can only get better. This is what the contrarian Einhorn saw in Ensco last summer.
 
As you can see, it was a heck of a call. Things have gone from "bad to less bad" in the drilling sector. The Gulf of Mexico accident wasn't nearly as awful as the press made it out to be. Crude oil has moved from the $75 per barrel to $90 per barrel. And Ensco has soared 35% since July...
 

The story behind this huge gain is one of the great secrets of stock trading... the phenomenon my colleague Steve Sjuggerud calls "going from bad to less bad."
 
You don't make the biggest post-crisis stock gains when good news starts appearing. You make it while things still look terrible... when most folks still think things "can't get any worse." This is when things get ridiculously cheap... this when the risk gets "wrung" out of the market.
 
When things get just a little bit better, a beaten-down stock with great fundamentals is like a coiled spring being released.
 
You're not going to find coiled springs by waiting on good news. Let price and value be your guide. When you find a hated asset that offers great value, just wait for the trend to reverse.
 
This value-focused "bad to less bad" approached worked for Ensco. It has worked for a hundred years. It will work for a hundred more.
 
Good investing,
 
Matt Badiali




Further Reading:

Read Matt's original Ensco write-up here: Why One Brilliant Investor Just Went Long Offshore Drilling.
 
And see a couple of editor in chief Brian Hunt's latest "bad to less bad" trades here and here.

In The Daily Crux
Market Notes
Big tech trend continues... IBM and EMC surge to fresh two-year highs.
 
Schlumberger and Weatherford break out to new highs.
 
More than two dozen semiconductor stocks post double-digit gains for the week... SMH hits new high.
 
Uranium giant Cameco up more than 60% in six months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1283.76 -0.2% +12.1%
Oil (USO) 38.92 +0.7% -0.4%
Gold (GLD) 132.69 -1.0% +18.4%
Silver (SLV) 27.74 -0.9% +51.5%
U.S. Dollar 79.99 -1.0% +4.1%
Euro 1.34 +1.7% -8.0%
Volatility (^VIX) 15.46 -5.7% -12.3%
Gold Stocks (^HUI) 515.95 -1.9% +15.0%
10-Year Yield 3.33 +0.9% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 129.30 +0.7% +12.5%
Canada (EWC) 31.32 +0.3% +15.5%
Russia (TRF) 25.37 +1.3% +23.3%
India (IFN) 31.84 -1.4% -1.0%
Israel (ISL) 17.79 -0.1% +10.6%
Japan (EWJ) 11.15 +0.0% +6.3%
Singapore (EWS) 13.92 -0.4% +18.5%
Taiwan (EWT) 15.71 +0.1% +18.2%
S. Korea (EWY) 62.98 +1.0% +26.5%
S. Africa (EZA) 71.72 +0.1% +25.8%
China (FXI) 44.55 0.0% +5.7%
Lat.America (ILF) 53.75 +0.2% +11.5%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service (OIH) 146.59 +2.4% +11.4%
Big Pharma (PPH) 65.55 -0.5% -4.4%
Internet (HHH) 75.44 +1.1% +32.8%
Semis (PSI) 17.53 +2.9% +31.1%
Utilities (XLU) 31.74 +0.5% +2.0%
Defense (PPA) 19.57 +0.5% +9.2%
Nanotech (PXN) 10.38 +1.5% -2.8%
Alt. Energy (PBW) 10.92 -0.2% -2.2%
Water (PHO) 19.48 +0.7% +11.2%
Insurance (PIC) 16.54 +0.2% +18.7%
Biotech (PBE) 21.67 -0.1% +24.9%
Retail (PMR) 19.02 +0.4% +16.6%
Software (PSJ) 25.89 +0.9% +21.7%
Big Tech (QQQQ) 57.00 +0.7% +22.9%
Construction (PKB) 13.60 +1.0% +10.0%
Media (PBS) 14.17 +0.3% +19.1%
Consumer Svcs (IYC) 68.45 +0.7% +21.7%
Financials (IYF) 59.90 +1.5% +10.3%
Health Care (IYH) 66.76 +0.1% +0.5%
Industrials (IYJ) 67.48 +0.5% +21.2%
Basic Mat (IYM) 77.86 -0.3% +24.2%
Real Estate (IYR) 56.40 +0.7% +22.3%
Transportation (IYT) 94.31 -0.2% +24.1%
Telecom (IYZ) 23.20 -0.5% +18.0%

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