On April 20, 2010, 40 miles southeast of the Louisiana coast, an offshore oil rig named Deepwater Horizon exploded into a giant fireball. It was the worst environmental disaster in U.S. history.
The blast instantly killed 11 workers and crippled the drilling platform. The entire rig would eventually sink.
The calamity spilled 4 million barrels of crude oil into the Gulf of Mexico. It was the biggest oil spill that has ever happened anywhere in the world.
The mess that washed ashore destroyed thousands of coastal businesses in Alabama, Florida, Louisiana, Mississippi, and Texas. The mess that didn’t wash ashore poisoned the rich Gulf fisheries.
It took almost two months to cap the oil well and stop the flow. By that time, the tab for damage had gone over $50 billion.
Negative media coverage was nonstop. Newspapers filled their front pages with pictures like this:
It was the worst-case scenario for any oil company. Everybody hated their guts…including investors.
Deepwater Horizon was in fact a joint venture. But British oil giant BP was the partner best known to the public. That’s why it took the public relations hit for the incident, and it hit hard. BP’s share price crashed.
In a matter of weeks, BP went from a market cap of $190 billion to just $85 billion. That’s a stunning collapse of $105 billion.
At that point, investors should have asked themselves, “Are BP’s assets really worth $105 billion less today than they were a month ago – or is there a distortion in the marketplace?”
The radioactive media coverage also hammered share prices of many other oil companies. Good companies that had nothing to do with the incident. That was a clue that the point of maximum pessimism was near.
The Deepwater Horizon event deserved the “disaster” label it got. I feel bad for the people who it hurt. It was disturbing to see the gobs of black petro-goo gunking up the beaches and the oil-coated birds and fish struggling against an unnatural death.
I don’t want to see anything like it again. But that doesn’t change the fact that more such incidents are going to happen.
And when they do, you can bet that there’s going to be more media frenzy. There’s going to be more boneheaded government responses. Mainstream investors are going to get scared. This all means more distortions in the marketplace.
Distortions that you can count on to run their course. But not before they slam the stocks of fundamentally sound, productive, well-run businesses. The Deepwater Horizon crisis actually put such companies on sale at bargain basement prices while Wall Street ran the other way. This gives us the opportunity to, in effect, buy diamonds at the price of gravel. Picking up that kind of value is what crisis investing is all about.
Had you gotten in near the bottom, when everyone else had abandoned BP, you could have made an 80% gain in about a year. Longer-term investors could have locked in a safe 6% (and growing) dividend yield. Nothing to bat an eye at in this low-interest-rate environment.
The Big Question
How can you know when the moment of maximum pessimism has arrived?
The hard answer: You won’t know that fear and worry have reached their maximum until after the fact. You’ll never recognize the exact bottom except through the rearview mirror.
But what you can do is recognize the signs that a market is near a bottom. That’s good enough to make you a winner. A big winner.
Here are a couple of things I look for.
One clue is investor sentiment. The mass media can be a big help in assessing it. A hot market, such as one trading near its all-time high or anything the financial media is cheering, is exactly what I’m not looking for.
I want to find hated markets. Like the oil industry after the Deepwater Horizon event. Hated markets are the home of astounding value.
When the front page of your newspaper is associating a country or a market or an industry with a crisis, it’s worth a look. The media are signaling that most investors have thrown in the towel.
In all crisis markets, everything gets slashed, the good companies and the bad alike. I want situations where extreme negativity compresses the share price of quality companies like a coiled spring. That’s another clue to watch for…when the crisis hammers the stocks of good companies whose businesses it doesn’t actually hurt.
Both signs – one-sided media coverage and spillover to companies that the problem doesn’t really affect – flashed bright red after the Deepwater Horizon incident. Just as they have in many other crises.
Despite the hysteria in the media, the blanket of oil covering parts of the Gulf of Mexico, ugly as it was, was not going to smother the oil industry. The mess wasn’t going to kill BP, a diversified, multibillion-dollar global company.
A cool-headed assessment of the situation would have revealed that it was near the point of maximum pessimism. In other words, it was time to buy.
Today there’s a similar situation in another hated, but essential, industry.
Like the oil industry, it’s dirty. That makes it a fun target for the media and politicians. It’s also an industry that’s absolutely crucial to modern life and that definitely isn’t going away. It’s arguably even more hated today than the oil industry was in 2010, which means the values are even more compelling. It’s an industry near the point of maximum gloom…and there could be rich profits for investors who get in now.
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