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Trade: Buy HNR
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It is an oil company whose primary holdings are in Venezuela. Chavez has nationalized all American oil companies recently and made HNR a 33% owner of its old fields along with some new undeveloped fields it threw into the mix as compensation. Due the political uncertainty, Wall Street coverage was essentially dropped, pending the final approval of the newly nationalized company. I think the reality is that there is very little downside and a pretty big upside as soon as the formal approval comes through. Chavez needs the oil revenue from his fields and HNR has the expertise, so I think he will sign the deal. The company plans to buy back stock; the CEO feels that the street has overreacted to the risk. He thinks the Chavez signing should happen pretty soon since the previous 15 of 17 such applications have already made it through the pipeline. While uncertainity still exists about various possible outcomes, the stock price seems to be mainly assuming low likelihood bad scenarios. I expect a series of confidence inducing steps that are likely, such as Chavez signing the agreement with HNR, the crediting of backdated revenues, the re-issued statements of earnings, the re-energized resumption of field work, etc. This is a kind of situation where I think market efficiency often fails since standard economic theory equates risk with uncertainty (proxied by volatility, regardless of whether its downside or upside) and hence this stock is undervalued even though the actual downside is limited. | ||
