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Halliburton (HAL) Has Disappointed In The Past, But Is Worth Another Try

“Once bitten, twice shy” is an old adage that should not be in the lexicon of any trader or investor. Just because a strategy or individual play didn’t work out once doesn’t mean it won’t the next time. If anything, an unforeseen short term drop in a stock that you have identified as undervalued from a long term perspective just means that, when it does start to rise, the ascent will be quicker than you might otherwise expect. Going back to the idea, when the time is right, is still a good trade even if the last attempt resulted in a loss. Halliburton (HAL), for example, is a stock that I have recommended in the past, but the fact that oil prices have languished and the result of that has come through in earnings and projections has led to several false starts. Despite that, it still looks like a good buy in front of next week’s earnings figures.

To be clear, I am not suggesting that you hold onto things forever and hope that they come back. Those who take an active role in managing their accounts should always be seeking to be making money from the maximum amount of their trades. Sitting on a loser because you believe it will come back some day is just leaving dead money sitting around; money that, in the short term could be better deployed elsewhere. If, however, your disciplined approach to account management leads to you cutting a position when it hits your stop loss level, that simply indicates that your timing, not your long term thesis, was wrong.

The long term reasons for buying HAL are still intact. If anything, following the announcement of the intended acquisition of Baker Hughes, the case is stronger now than it was a few months ago. That merger may be hung up right now, but the fact that it was proposed at all is a long term positive. Well-run companies with long term growth plans take advantage of a depressed market to buy assets relatively cheaply and consolidate their positions. That is what Halliburton is trying to do in this case. The market, however, remains focused on the short term travails of the company, not the long term prospects.

(Click to enlarge)

The stock price has dropped to the bottom of the $40-50 range that has held for most of this year, and that creates an opportunity to try again with another risk controlled trade. Buying at these levels with a stop loss set to protect against a breakout below the $37.51 fifty two week low, say at around $36, would limit potential losses to around 10 percent, which is manageable. That is all well and good, but with earnings due next week, that level could be in danger quickly, so in order to buy here you have to have a reason to believe that the release won’t prove to be a catalyst for a huge drop.

There are a couple of good reasons to believe that to be the case. I have said many times that the market’s reaction to news of any kind is driven as much by positioning and traders’ expectations as it is by the news itself. In this case, with the stock having been under pressure for so long, the fingers on the trigger after earnings will most likely be the shorts, not the longs. That is especially true when you consider that short interest in the stock is at an all time high. It looks like those that wish to sell have already done so. Bad news is expected so would therefore probably result in a muted reaction, whereas better than expected numbers could squeeze a lot of shorts out quickly.

In addition, “better than expected” shouldn’t be too hard. Analysts always have a tendency to underestimate earnings (over the last four or five years over 70 percent of companies reporting have beaten estimates) and when times are tough, that tendency is exaggerated. They don’t want to be the one firm that presents a rosy picture going into earnings for a company that underperforms, so will tend to err on the side of caution. As a result, HAL is expected to report earnings down a whopping 68 percent from last year, making a beat a distinct possibility.

Of course, as mentioned above, this is not a play without risk. If, however, the stock does fall after earnings and your stop is hit, then by all means move on and look for a better short term use for your cash. Just don’t be afraid to come back to the idea in the future if conditions once again look right.

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