Magnum Hunter Is a Good Short-Term Play

Bet against short-sellers who think the oil firm is going broke.

It's my contention that we've entered a bear market, but that there are still opportunities as stocks swoon and short-sellers attack companies with balance sheets that contain high-yield debt.

The lions smell blood in the herd, and the companies perceived as the weakest are being savaged -- good news for savvy investors.

Consider Magnum Hunter Resources (MHR), a oil-exploration company that's being eviscerated by short sellers. The company's common stock has traded as low as $0.30 a share today, and its three preferred-series shares (MHR-C, MHR-D and MHR-E) are trading at an almost incomprehensible eight to 11 cents on the dollar.

I've written about Magnum many times, but I've never seen anything like this.

The shorts are telling the market that Magnum is going bankrupt, but things are supposed to be going the other way. Magnum hired two new senior executives in the last month, and the company's CEO noted in August that the MHR had received multiple bids valuing its 45.5% stake in the Eureka Hunter pipeline at $450 million to $600 million.

A Eureka sale would permanently put to rest Magnum's liquidity concerns and force the shorts to hurriedly cover their positions. Instead, I believe the shorts are playing "rumortrage" -- spreading all sorts of fake stories about Magnum's financial condition even though a short-squeeze is only one press release away.

That's why I think Magnum is worth a short-term trade here. I believe the share price in no way reflects the full long-term value of the company's assets.

If Magnum makes an announcement on a sale of its Eureka stake, my guess is that the stock will quickly head back to the $1 mark. That'd be more than a 200% return from the stock's current level of around 30 cents, and such a "three-bagger" might be just what you need to generate profits in today's Time of the Bear.

Yep, I think we're in a bear market here. I'll let the statisticians quibble over whether the S&P 500 actually has to fall 20% before we "officially" enter bear territory, but I'm going with U.S. Supreme Court Justice Potter Stewart on this one.

While struggling in a court case to define pornography, Stewart famously declared: "I know it when I see it." To me, this is a bear market -- and I know it when I see it.

The Federal Reserve-fueled bull market is over for one simple reason: Earnings have stopped growing.

Goldman Sachs' U.S. strategist this morning lowered his estimate for 2015 S&P 500 earnings to $109 a share from a prior $114-per-share prediction. This implies a 3% decline from 2014. So it's simple -- earnings have stopped growing and stock prices have stopped rising.

Goldman's strategist also lowered his 2016 forecast for S&P 500 earnings to $120/share from $126/share.

True, that implies 10% year-on-year growth for 2016 vs. 2015, but I believe that estimate (like most from Goldman) is far too high. I personally think that Goldman is structurally long on the U.S. market because underwriting fees are an important part of the firm's revenue structure.

But unlike Goldman, you as a retail investor don't have the structural need to be long. So, don't be.

At the time of publication, Collins' firm was long MHR, MHR-C, MHR-D and MHR-E, although positions may change at any time.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider MHR and its preferred shares to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.