Love Thy Nabors

That's correct: Buy land drillers because day rates and earnings estimates are dropping. My favorite is Nabors (NBR Quote). It's by far the category killer in the space, with the best assets, client/geography diversification and management. I just love the company's balanced business exposure mix of oil vs. natural gas, and domestic vs. foreign. But if my thesis plays out, all of the drillers should work.

A Heavy-Duty Similarity

With the downturn just starting, why is Nabors one of my biggest positions? Why haven't I waited? I may not be the most original thinker on the planet, but I can identify investing patterns such as seasonal trends and copycat trades. One recent sector trade stands out as a perfect analogue to the land drillers: the heavy-duty truck stocks in general, and Cummins (CMI Quote) in particular.

The heavy-duty truck industry just began a severe downturn after an explosive multiyear recovery. The current contraction is related to changes in emission regulations and has been very well telegraphed to investors and analysts. Because of this inevitable truck recession, every single Wall Street analyst was cautious about, negative or neutral on, or short the sector over the past 18 months.

And yet a funny thing happened. The shares appreciated nicely in 2006 and are exploding in 2007. As the fundamentals of the truck companies deteriorate, the share prices hit new highs almost daily. I can only conclude that investors discount the next recovery as soon as the current down-cycle begins in earnest.