Love Thy Nabors

I am a deep-value investor. I buy what the stock market hates. It's not easy buying stocks when all other investors and analysts disapprove of a company or sector, but it has been a profitable strategy for me. Plus, it fits my disposition. I guess you can say I like doing things the hard way.

Right now, one of the most loathed parts of the stock market is the land-drilling rig industry. The stocks have experienced a terrible bear market, slumping some 25% or more. Share valuations are downright pitiful at mid-single-digit price-to-earnings ratios as well as similar enterprise-to-EBITDA levels. Most Wall Street firms have tepid outlooks and ratings on the industry.

Not surprisingly, current business conditions are actually quite good for land drillers. Although prices and profit margins have been tapering lately, they remain quite healthy, and therein lies the problem. Cyclically peak business conditions have generated a fair amount of new rig capacity, meaning oversupply may hit the fan this year.

Virtually every negative opinion on the sector is based on these overcapacity/cyclical downturn concerns. I can't even attempt to deny that pricing and profitability for land drillers will erode. It absolutely must. There is no doubt that the fundamentals must fade. Precisely because the downturn has begun, I think land drillers are an excellent long idea....