Sep 19, 2009
Contrarian Investing: An Absurd Way to Absurd Gains
By Andrew Mickey, Q1 Publishing
It was the most absurd investment I could find…
Yet it turned out immensely lucrative. More importantly, it will show you exactly how to make a fortune in this market.
The economic recovery has been weak and showing only the faintest signs of improvement.
The downturn has affected everyone, but the trucking industry has been one of the hardest hit. Total truck tonnage shipped is down more than 10% from last year. And it’s still declining. Even the Chief Economist at the American Trucking Association recently admitted, “I just don't see anything on the economic horizon that suggests freight tonnage is about to rise significantly or consistently.”
Trucking companies are struggling for survival. In the first three months of the year, 480 trucking companies declared bankruptcy. More are going under every week too.
On top of all that, the company about to look at has been going through tough negotiations with its unionized workforce. It lost $26 per share in the last year. A few days ago, bankruptcy was a high probability. As you might expect, were trading 95% below their 5-year high.
There was not a single “sensible” reason to buy beaten-down shares of YRC Worldwide (NASDAQ:YRCW). But since it was initially recommended President’s List readers, shares of the beleaguered trucking company have bounced back and turned an “absurd” idea into a 73% gain in a few short days.
That’s why today, armed with the lessons from this absurd trade, we’ll look at how to make an absurd amount of money in the weeks and months ahead and how to apply the lessons to a similar opportunity shaping up right now. One that is potentially even more lucrative.
Getting Squeezed: Blood in the Streets Investing
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Baron Rothschild is credited with saying, “The time to buy is when there's blood in the streets.”
Well, a few weeks ago YRC Worldwide was bleeding profusely.
Aside from the company’s massive losses, declining revenue, and other problems, it needed to make a about $1 billion debt payment within a month. And with $164 million cash on hand, YRC Worldwide was in a bind.
Seemingly everyone on Wall Street knew it too.
The sharks smelled blood. There were massive bets placed against YRC Worldwide. At the time, 29% of all existing YRC Worldwide shares were sold short (heck, even a virtually worthless AIG had only 21% of its shares sold short). Basically, there was more than $35 million bet that would only make money if shares of YRC Worldwide went down.
The company was pretty much left for dead. But for contrarian investors, it was looking better than ever. Basically, YRC Worldwide shares were priced so low any news was good news.
And it didn’t take long for the good not horrible news to come. The company found a bank
willing to throw it a $1 billion lifeline to help out with its cash crunch. And
it reached a deal for a pay cut from by its unionized workers.
Since it was priced for the worst, when the less-than-worst news came out, what looks like a “short squeeze” (the rush of buying when short-sellers try to “cover” their shorts by buying stock all at the same time). The stock soared from just over $2 well over $4 per share within a few days.
Minimum Risk and Maximum Reward
When I initially recommended YRC Worldwide share to President’s List readers, I told them, “It’s ugly for YRCW and it’s tough to imagine it getting any worse. Frankly, that’s why I like it right now…[There’s] nowhere to go but up.”
Of course, just simply going out and buying shares in every company just one or two wrong moves away from falling into bankruptcy isn’t going to cut it. There are a few other elements that have to be considered before stepping into these types of situations. The most important of which is risk and reward.
I’ve worked in the trucking and transportation for years. It was the family business. I know how it works and I know how all the big competitors work. In this case, there isn’t much difference between many of the companies. They compete mainly on cost and they all move up and down with the fortunes of the overall industry.
That’s why when looking at YRC Worldwide, the upside potential was pretty straightforward. All you had to do was look at its competitors.
YRC Worldwide is the big boy in the trucking industry. It generates more than $8 billion a year in revenues, more than any of its competitors. Yet, the market valued YRC Worldwide at less than $150 million at the time of the recommendation (it peaked this week at more than of $270 million).
Meanwhile, smaller competitors were valued for more – much, much more. For instance, Mr. Market valued JB Hunt (NASDAQ:JBHT) at $3.6 billion even though it generates 25% less revenue than YRC Worldwide. Landstar Systems (NASDAQ:LSTR), which generates only one fourth of the revenue YRC Worldwide does, was fetching $1.8 billion.
Needless to say, there was a lot of upside when you looked at companies which offer very similar services. If it went from $150 million market cap to just $1 billion, the trade would have been a huge success.
The other key element to the trade’s success was there were two catalysts. The first was the immediate need for a debt refinancing. The second was the union negotiations. Both were expected to end terribly. So any good news would be very well received. And it was.
“What if I’m Wrong?”
Now, I’m not recommending YRC Worldwide shares right now. After it doubled, we took measures to lock-in gains, stay in the position for any upside, and protect against a correction (read: trailing stops). So we sold out during the recent pullback. But I wanted to use YRC Worldwide as just one example of the type of opportunities that are out there in this market.
Frankly, we’re in a market which could go either direction at this point. The bear case is a strong one. Just look at commercial real estate and adjustable mortgage rate issues (more on these situations and how to play them for maximum gain in the next Prosperity Dispatch).
The bull case is a strong one too. Bob Dickey of RBC Wealth Management summed up what we’ve been saying since springtime: “This trend can last some time with the volume growing and the move accelerating as the fear of missing out continues to spread.”
That’s why, whatever camp you’re in, I encourage you to once again ask yourself: What if I’m wrong.
If you’re a bear, you could miss out on some substantial short-term gains. If you’re a bull, you’ve got to consider the downside risk and be prepared (and willing) to profit if the markets take a turn for the worse.
By asking yourself that question and finding the right trading and investment ideas with extreme risk/reward ratios, you’ll be prepared for wherever the market and the economy goes.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1
Publishing
P.S. I’m in the office here on Saturday working on a couple of projects for our premium service members. The opportunities out there right now are still very enticing.
For instance, with the lessons we learned from making 73% on YRC Worldwide in just over a week, we’re applying to another “crisis” situation.
I’ve recently come across a small gold producing mining company with a market cap under $50 million. It has to come up with $60 million to pay off a loan within the next month.
It’s not looking “good” to most investors. Its shares are down more than 90% in the past few months most other gold stocks have done trounced the market. The sharks are circling and it’s certainly not a sure thing, but the risk/reward makes it a very compelling short-term opportunity. President’s List readers should keep a close eye on their inboxes. If you’re not already on board, you can join them here.
