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Weakness In This Stock Defies Logic


One of the most common mistakes made by traders and investors is the assumption that the market that they are in is logical. They think that, with all the money at stake and all the high-powered minds devoted to trading, the price of anything must reflects a sober consideration of all factors. In reality, markets are more mob rule than collective wisdom, and group think exaggerates faults as much as it reflects analysis.

Traders quickly learn that, and two things then become apparent. The first is that there is no point in opposing an illogical move in the short term; as the old saying goes, the market can stay illogical a lot longer than you can stay solvent. The second is that, despite that, logic does eventually win out at some point, so you should keep an eye out for things that run counter to common sense. Take the situation with Solaris Oilfield Infrastructure (SOI) for example.

SOI, like a lot of energy stocks, generally moves in direct correlation with oil prices. In this case, though, it makes no sense. As their name suggests, Solaris is not an oil company but an oilfield infrastructure company. More specifically they provide mobile proppant services for shale oil operations. It is generally accepted that what is holding oil down despite OPEC’s actions and rapidly increasing global growth is the continued increase in U.S. shale oil production, and that has to benefit a company that services those operations. For SOI to fall on lower oil prices that result from their potential market expanding is so stunningly illogical as to be almost comical, but that is what has happened.

(Click to enlarge)

Solaris is a fairly young company, having been founded in 2014 and it went public just a few months ago. The IPO was, probably unsurprisingly for a small, young energy company at this time, a bit of a disappointment. The stock was priced at the very bottom of the expected $12-16 range, dropped and remained below that $12 mark for several months, before recovering, then weakening again recently. The chart for oil futures during the same period shows the most likely reason for that pattern.

(Click to enlarge)

As I said, SOI following oil is I guess understandable in the context of the herd mentality that often grips Wall Street, but a detached analysis shows it to make absolutely no sense, particularly the most recent declines. The lower oil prices that have resulted from continued expansion of shale oil recovery in North America could, I guess, lead to some pressure on margins for a company like Solaris, but at this stage of their development, growth is far more important than margins.

Even that margin pressure is unlikely, however, as fracking inherently needs sand based proppant, and SOI’s mobile solutions are designed to offer cost benefits in that area. In other words, not only is oil falling in response to an expansion of SOI’s market, but the falling price also makes their services more attractive.

So, we have a young company whose business should give it a degree of protection from volatility in the price of oil still moving with that price. The first indication of the illogical nature of that came earlier this week when Solaris released an upbeat earnings report for a quarter marked by a big drop in the price of oil, clearly showing that their fortunes and WTI are not correlated. Traders and investors will come to see that, so buying the stock now in anticipation of further expansion of their market is the only logical thing to do.

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