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Lessons Learned From an FCX Bungle

I got out of Freeport McMoRan with only a small profit because I wasn't patient and ignored my initial reasons for buying.

The mistakes I made with Freeport McMoRan (FCX) - Get Freeport-McMoRan, Inc. (FCX) Report this year were classic and a great learning experience of what not to do in the market. But we can and should make lemonade out of this lemon. If we've learned the lessons from that example, we've now got a couple of nice stocks today to consider that show a similar pattern and could be poised to make up for my mistake.

The copper and gold stock yesterday closed at $58.12, up from its December lows of $16.80, a move of more than 340%. In this market, a three-bagger has been pretty rare - it's rarer still that I hold a sizable trade pretty close to the price of a low and fail to capitalize on its big move.

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I bought Freeport in November in the low $20s on a slow and methodical scale over a few weeks. The method of scaling in allows you to spread out your price basis and be more likely to withstand the "random walking" that all stocks do. I made no mistakes in that process, buying shares in the high $20s all the way down to $19 and giving me a very tidy average in the low $20 range.

I had bought Freeport using two very strong arguments: first, Freeport was caught in the whirlwind deflation trade of gold and oil going through the second half of 2008. While oil was collapsing off of its highs in July 2008, all commodities and commodity-based stocks were getting pummeled as well, most of them unreasonably so. Freeport had managed to trade north of $120 earlier in 2008 before it started its decline into the $30 range in October, when it started to pique my interest.

The second reason was its "cash" position and I don't mean dollars. With the stock in the mid $20s, many of Freeport's analysts had determined that the cash holdings of copper and gold contained in storehouses and in its fully owned physical assets were now worth more than the full market cap of the company. This by itself wasn't entirely unusual -- we were encountering a lot of securities where the cash position was equal (or greater than!) the market cap, but this was very strange and rare for a commodity stock.

In December Freeport not surprisingly suspended its dividend, driving the stock price down to the lows. I held on. As Freeport began to rally a bit, its debt was downgraded -- again. This shouldn't have bothered me because their bonds were already junk level and a downgrade hardly should have mattered, but it did. It bothered others too, evidenced by the stock languishing in the low $20s.

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Finally, as it looked like I would clear a profit, the company announced a fresh capital raise of $750 million. This also didn't come unexpectedly but was the last straw and I bailed in January for a tiny profit. It has been a straight up-move ever since, as Freeport has not only shown real value but acted as a proxy for a gold inflation trade.So, what did I learn and what can you learn? I relearned the art of patience, particularly if the original arguments I made continue to make sense. If my initial rationale for buying the stock hadn't changed, there was no reason to become frustrated and sell. I also relearned that the reactions of the market to bad but not unexpected news should be ignored.

So moving forward, here are a couple of stocks that have the same kind of good arguments going for them like Freeport had and have been up against some superficially discouraging but eventually passing bad news.

Baker Hughes


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is an oil drilling services company that was mercilessly hammered last year from a high of almost $90. Its business continue to shrink as demand has collapsed, and the company needed a capital raise and cut massive numbers of jobs. This has kept the stock languishing in the $40 range after seeing a low in the mid-$20s in March.

But Baker Hughes has been getting lean and is still one of the largest oil infrastructure companies. If oil can maintain its price in the $55 to $65 range and supply continues to slowly diminish, the call for drilling will go out again and Baker Hughes will come back with a vengence.

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Chesapeake Energy

(CHK) - Get Chesapeake Energy Corporation Report

is a straight natural gas play and has seen the continued depressed market in natural gas keep its stock in the doldrums throughout 2009, closing yesterday at $24.52 after seeing highs of well over $60 in 2008. It's dealt with the minor scandal of a $75-million bonus to CEO McClendon, which shouldn't affect stock price at all no matter how we might view it morally.

However, I sense investors are entirely fed up with this stock just like I was with Freeport and are throwing in the towel. That's the time to get in. If natural gas stages any kind of rally going into the heating season this year, Chesapeake will be a fast and strong beneficiary.

Don't just beat yourself up for your trading mistakes. Learn from them and find new ideas from those lessons.

At the time of publication, Dicker had no positions in the stocks mentioned, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.