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I’ve learned many invaluable lessons over my 25-year investing career.
Few lessons I’ve found more valuable than to ignore the popular investing platitudes, most of which are delivered as admonishments: Don’t send good money after bad. Don’t catch a falling knife. Don’t double-down on an investment. Don’t chase losers.
Platitudes are generally worthless, because no blueprint for successful investing exists. Every investing situation is different from every other investing situation. Investing isn’t analogous to the roll of a fair die. A sensible course of action in one situation could be ridiculously nonsensical in another.
I’m a skeptic by nature. Therefore, I’m naturally a contrarian investor. This means I spend a good of time willingly poking around in what you could politely call “scatological” environs (figuratively speaking, of course). I’ll frequently bypass best of breed companies in search of the crappiest of breed.
The Brazilian oil giant Petrobras (NYSE: PBR) is a recent example of crappiest of breed.
Petrobras is a mess: It’s a corrupt, politically manipulated state-run oil company. It’s grossly inefficient, and it’s in hock like few companies. Petrobras carries $140 billion of debt, yet it generates $100 billion in annual revenue. Exxon Mobil (NYSE: XOM) carries $44 billion debt, but it generates $205 billion in annual revenue.
Exxon Mobil continually makes money and continually raises its dividend. (Others like it can be found right here.) Petrobras’ earnings are hit or miss quarter to quarter. The past two quarters have been misses (with losses), as have the past two years. As for the dividend, Petrobras hasn’t paid one since 2014.
To say that Exxon Mobil is the superior oil company is to belabor the obvious. But I’m uninterested in the best oil company. I’m interested in the best oil-company investment value – and value is relative to price.
In early 2015, I thought Petrobras was the best oil-company investment value. Petrobras stock, above $70 as recently as 2008, had been tamped down to $6 on a ceaseless barrage of damning financial reports, falling oil prices, analyst downgrades, and political scandal.
Accumulating Petrobras Stock
I started to accumulate Petrobras stock at $6 a share, thinking the worst was over. I was wrong. The barrage continued and Petrobras shares were tamped down to $3.
What did I do? I continued to accumulate Petrobras shares, thus lowering my cost basis. Most analysts would have snickered and accused me of catching a falling knife or labeled me an idiot for sending good money after bad.
My view was different. Like everyone, I knew Petrobras was a mess, and a mess is how it was priced. More important, Petrobras was priced like a mess that would never be cleaned up.
Exxon Mobil, in contrast, has always been priced as a best-of-breed company, which it is. But a best-of-breed company isn’t synonymous with a best-of-breed investment. Investors overlook the fact a lot more effort and a lot more good news are required to keep a best-of-breed-company stock like Exxon Mobil on an upward trajectory.
The opposite is true for many of the Petrobrases of the world. With expectations set so low, a whiff of good news is all that’s needed to move shares higher. Such has been the case with Petrobras.
Dilma Rousseff, Brazil’s grossly incompetently, reprehensibly corrupt president, was removed from office this year. Under Rousseff’s watch, Petrobras had morphed into a slush fund for Rousseff political allies. Pedro Parente, formerly the top executive at the Brazilian unit of US agribusiness giant Bunge, was brought in to restore confidence and oversee asset sales to unburden some of Petrobras debt. Parente has made inroads on both accounts.
Petrobras Stock Soars
With expectations set so low, rising oil prices, Rousseff’s departure, and Parente’s first steps on the road to redemption have been enough to set Petrobras shares on an upward trajectory. Petrobras stock has doubled year to date. Exxon Mobil shares are also up, but by a more subdued 13%.
Petrobras vs. Exxon Mobil: Share Price Year to Date
To be sure, my contrarian approach isn’t for everyone. In fact, it’s for few investors. My approach requires a high pain threshold, a willingness to appear the village idiot (at least for a while), the ability to stick to your guns, and a lot of patience.
Last month, I sold my Petrobras position for a 50% profit. And if I should be admonished for anything, it’s this sale. For the sale was an unfortunate error. Had I not let my patience falter, I’d have a 75% profit on my Petrobras investment today.
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