Corrections in the context of the stock market have a negative connotation.
You’re probably familiar with the traditional downside correction when a security falls in price or corrects after it’s been discovered by the public that its shares have run up too far, too fast, resulting in a temporary overstatement of a security’s market value, which is some amount over its intrinsic value.
A flip-side scenario is also possible when a stock’s market value has fallen considerably below its intrinsic value. When it’s discovered that investors have been too pessimistic (usually through the release of better-than-expected earnings results), shares can correct to the upside and reward investors who saw the discrepancy between a stock’s market value and its intrinsic value.
One badly bruised stock that’s fallen well below what it’s worth, I believe, is Crescent Point Energy (TSX:CPG)(NYSE:CPG), a roughed-up driller that has experienced a tremendous fall from grace. The stock had nosedived over 92% from peak to trough, ruining a lot of investors who stood by the name as the rug was pulled from underneath the company’s feet in 2014.
The stock was the epitome of a value trap, injuring investors that attempted to catch the falling knife. High capital spending, sub-par acquisitions, a history of diluting shareholders, taking on exorbitant amounts of debt, and fat executive compensation packages were just some of the sore spots on Crescent Point, as the entire sector came crumbling down like a pack of cards.
Indeed, both investors and the balance sheet have been under unbearable amounts of stress in the past!
Ex-CEO Scott Saxberg was eventually shown the door after spending 17 years with the firm, and while shares have continued to crash further, there are reasons to believe that the worst days could already be in the rear-view mirror due to some developments that can only be described as encouraging.
Management’s new focus is on lowering costs of production, improving the health of the balance sheet, and driving sustainable improvements at the operational level.
A lot of Crescent Point’s past issues weren’t just because oil prices fell off a cliff. There was quite a bit of mismanagement as an unsuccessful activist investor shed light on just over a year ago. With a new strategic shift now apparent, I’m liking the new trajectory, but it’s the severely depressed valuation that has me licking my chops!
At the time of writing, the stock trades at just 0.4 times book and 0.9 times sales. That’s ridiculously cheap, especially when you consider the changes to management’s strategy and the subtle improvements that have been going on behind the scenes.
As company-specific fundamental improvements are made in conjunction with the industry-wide picture, I certainly see a scenario where Crescent Point could become a multi-bagger. Of course, you’d need to be patient with the name and not give too much merit to those potentially violent short-term fluctuations.
Stay hungry. Stay Foolish.
