I’ve almost given up on trying to dissuade people from entering into the “bankruptcy trade” with companies like Whiting Petroleum (NYSE:WLL). Folks who are hellbent on buying WLL stock are going to do what they please irrespective of anyone’s warnings, I suspect.
On July 7, I suggested that WLL shareholders should “eject and never look back.” That message was intended for people considering holding on to their positions in the downtrodden shale-oil company.
I hope that people listened to my advice. From July 7 to the end of July, the WLL stock price fell from $1.12 to 78 cents. That might not sound like much, but it’s actually a 30% decline.
Even with the stock’s downward trajectory, there could still be a way to pick up some profits from WLL stock. It’s not necessarily something I recommend attempting to do, but at least it should turn out better than buying WLL shares, holding them, and praying for a miracle.
A Closer Look at WLL Stock
Back in 2008, when West Texas intermediate crude oil briefly sold for $135 per barrel, WLL stockholders were riding a bull run to the top, it seemed. Multiple booms and busts later, and WLL shares settled between $7 and $8 at the beginning of 2020.
The oncoming crash couldn’t be predicted and will not soon be forgotten. Touching a 52-week low of just 25 cents, WLL stock drained accounts and sent the bulls into hiding.
At July’s end, WLL has trailing 12-month earnings per share of -$41.61. Bear in mind, that’s for a stock that’s under $1. Also, there’s no dividend to speak of.
Don’t Set It and Forget It
Given the foregoing numbers, it’s awfully difficult to justify a buy-and-hold position in WLL shares. Making matters worse is Whiting Petroleum’s press release addressing the company’s reorganization plans.
Therein, Whiting Petroleum proclaims its intention for “existing equity holders to receive 3% of the new equity of the reorganized Company and warrants to purchase additional equity of the reorganized Company.”
I’m not the only one to notice that current shareholders will collectively only receive a 3% stake in the equity (plus warrants possibly, if applicable). InvestorPlace contributor Todd Shriber noticed it too, and he correctly concluded that WLL would decline from $1.09 “because its current price isn’t indicative of what equity investors will control in the post-bankruptcy Whiting.”
Moreover, owning WLL stock long-term probably wouldn’t be an ideal way to bet on an oil-price recovery. As InvestorPlace contributor Laura Hoy explains, “a sharp, sustained recovery in oil prices simply isn’t in the cards” and oil prices are “nowhere near the levels they need to be for investors to go making speculative bets on failing oil firms.”
Be Nimble, Be Quick
I must give credit to authors Shriber and Hoy for seeing clearly what the “hold and hope” traders can’t seem to see in WLL stock: a sustained share-price recovery simply isn’t in the cards.
A better strategy, if you must trade the stock at all, is to get in and then quickly get out. In other words, treat WLL as a trading vehicle rather than a set-it-and-forget-it type of investment.
Even stocks representing bankrupt companies don’t go down in a straight, vertical line. It’s possible to buy a few shares after the stock has dropped four or five days in a row. Just be sure to take profits as soon as you get them.
Additionally, it’s advisable to set a stop-loss so that you know your maximum loss on the trade ahead of time. The idea is to bet on the so-called “dead-cat bounces” that happen with falling stocks.
This strategy requires constant vigilance over the price action of WLL stock. Above all, don’t hang on to your positions for very long as a small loss can quickly turn into a big one.
The Bottom Line
In order to trade WLL stock profitably, you’ll need to be like a sniper. The general idea is to capitalize on small retracements as the share price heads toward zero.
This is neither foolproof nor very safe, by any means. Still, it’s probably better than holding on to shares of a company that’s quickly circling the drain.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.