Several weeks ago, we noted how the "Deepwater Horizon" effect had crushed offshore drilling specialist Diamond Offshore. Despite being one of the field's most elite companies, and despite having limited exposure to the U.S. market, Diamond shares declined a huge 35% in just months. Investors simply dumped everything associated with sticking a pipe in the ground.
Just after our bullish note, Diamond backed off a few dollars per share. But as you can see from today's chart, this decline was a "fake out before the breakout"… And yesterday's trading sent the stock soaring to a new two-month high.
Despite that bit of price strength, Diamond still trades for only eight times earnings. This looks like a solid bottom from which to get long offshore drillers like Diamond and Ensco. As we mentioned a few weeks ago, you have an unloved sector, you have cheap valuations, and now you have prices moving in your favor. It's what the contrarian, "buy after the disaster" trader is always looking for.
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