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,…