Even With The Problems, Buying Petrobras Is A Trader’s Trade
By Martin Tillier - Sep 25, 2015, 4:56 PM CDT
Okay, I will freely admit that I’ve tried this before. To somebody trained to look for contrarian plays, bottom fishing for a stock like Petrobras (PBR) is just too tempting, despite all of the obvious problems.
In addition to oil’s decline, Petrobras has been hit by political chaos and scandal in Brazil and the resulting collapse in the Real. In addition, they created a problem for themselves by borrowing “cheap” dollars before the currency collapsed; debt that is now extremely expensive to service. I know all of this, but I was trained as a trader, so I cannot resist the chance to try one more time.
Despite all of the problems, you have to believe that the bankruptcy of the Brazilian state oil company is a virtual certainty to justify the current valuation, and I don’t, at least not imminently. If nothing else, that seems to be some way off, given that the current market capitalization of the company is about one third of the book value. The aforementioned dollar denominated debt makes that number somewhat misleading, as do continued ongoing losses, but there would seem to be enough room for survival to be more likely than failure. Add in the political will in Brazil to keep the nation’s flagship company afloat and the risk of bankruptcy diminishes considerably.
Given that the risk of total loss from buying the stock doesn’t look too bad, then bottom fishing can be justified, as long as two things are true. Firstly,…
Okay, I will freely admit that I’ve tried this before. To somebody trained to look for contrarian plays, bottom fishing for a stock like Petrobras (PBR) is just too tempting, despite all of the obvious problems.
In addition to oil’s decline, Petrobras has been hit by political chaos and scandal in Brazil and the resulting collapse in the Real. In addition, they created a problem for themselves by borrowing “cheap” dollars before the currency collapsed; debt that is now extremely expensive to service. I know all of this, but I was trained as a trader, so I cannot resist the chance to try one more time.
Despite all of the problems, you have to believe that the bankruptcy of the Brazilian state oil company is a virtual certainty to justify the current valuation, and I don’t, at least not imminently. If nothing else, that seems to be some way off, given that the current market capitalization of the company is about one third of the book value. The aforementioned dollar denominated debt makes that number somewhat misleading, as do continued ongoing losses, but there would seem to be enough room for survival to be more likely than failure. Add in the political will in Brazil to keep the nation’s flagship company afloat and the risk of bankruptcy diminishes considerably.
Given that the risk of total loss from buying the stock doesn’t look too bad, then bottom fishing can be justified, as long as two things are true. Firstly, you have to be aware that there is a risk, even a slight one, of total loss, so any capital used should be that set aside for risk. Secondly, you have to understand that a trade like this can be done multiple times as long as you are disciplined about limiting your risk in normal trading. The current chart allows for that kind of risk controlled trade.
The bounce off of the $3.77 low achieved earlier this week looks unimpressive on a 1 month chart (above) but Thursday’s close at $4.14 actually represents a 10 percent jump from that level. That allows for a stop loss below that low, say at $3.70, which would limit losses to around 10 percent of invested capital. Given the price/book data, a 50 percent jump or more if Petrobras simply survives the next few weeks is a distinct possibility.
As I said, I have been down this road before and lost money, but that doesn’t matter to a trader’s mind. The past is irrelevant; a set up is a set up, regardless. In fact, given the tremendous risk/reward of a trade like this you can absorb several failures and still have a chance at a decent profit. I will, therefore, try again. If PBR continues to fall, then I will take a small loss and move on to the next trade. That is what traders do and if you are not prepared to do that on a regular basis then trading is probably not for you.
