Linn Energy, LLC (NASDAQ:LINE) units are down 89% from their 2011 high. And they’re down 92% over the past year. But one sign shows this firm could be on the verge of a triple-digit move higher.
You might not believe it, but there’s more investor interest in Linn stock right now than at any time in history. And this could lead to huge gains in LINE stock over the coming months. Let me explain.
Has Line Energy Stock Finally Bottomed?
Regular readers know “ugly-to-less-ugly” setups are a remarkable source of low-risk profits.
Ugly-to-less-ugly is a phrase I coined to describe buying assets that have been hit hard by bad news, digested most of the terrible headlines, and are now poised to run higher. During the period, the asset won’t appear in a magazine. You won’t read about it in the newspaper. Publishers know the idea will disgust readers.
But it’s in this kind of “ugly” condition that you can pick up assets at only a fraction of their intrinsic value. During these periods, you will see stocks trading at ridiculous valuations like half of book-value or five times that of earnings. Investors who step in and buy amid the gloomy news can double or triple their money if even a bit of optimism returns to the market.
Keep in mind that it doesn’t take great news to make big returns here. Even the faintest bit of good news can double the price of a cheap, hated asset. All you need is to go from “ugly-to-less-ugly.”
I believe this is the type of situation we’re seeing play out at Linn Energy. During the shale boom, investors fell in love with the Limited Liability Corporations (LLCs) that were being spun out by Wall Street. Because these firms are required by law to pay out all of their earnings as distributions, these names often sported yields as high as seven percent, 10%, even 15%.
The formula works as long as energy prices stay high. But with the bust in the oil patch, LLCs like Linn could no longer afford to make those oversized payouts. LINE stock plummeted in value, falling more than 85% over the past year.
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Yet despite the ugly headlines, I’m actually starting to warm up to this firm. Most investors have given up on the energy sector, leaving shares trading at cheap valuations not seen since the 1980s. Today, Linn Energy has a market capitalization under $1.1 billion, pennies on the dollar from what the firm traded for only a few months ago.
Granted, the firm isn’t profitable at current oil prices, hence why the short sellers have been heavily betting against it. Today, LINE is one of the most heavily shorted stocks on the NASDAQ. At current prices, most of the bad news has likely already been priced in.
Just imagine if we see even the slightest rally in oil prices. There are going to be a lot of speculators caught with their pants down. Even a tiny improvement in the fundamentals could send short-sellers scrambling to cover their positions.
Chart courtesy of www.StockCharts.com
LINE stock is also looking good from a technical perspective. As you can see in the chart above, units have been stuck in a downtrend for months, making a long series of lower highs and lower lows. But after a big rally, Linn Energy was finally able to break this decline by making a higher high earlier this month.
Volume seems to be backing up the bullish argument, too. In late September, shortly after LINE stock bottomed out, shares exploded higher on heavy volume. This is a sure sign the firm is under accumulation by institutional investors.
So is it time to rush out and buy Line Energy stock? Not yet. We have to wait until units close above the previous $3.90 high to confirm the new uptrend has begun. But if we see a breakout here, the bottom in LINE stock could finally be in place.
Here’s Why Line Energy Could Soar Higher
Bottom line; the big money is not made by waiting for things to go from great to better, but from “ugly-to-less-ugly.” This is why now is precisely the time to look at Line Energy stock—when the idea makes most people sick to their stomachs.