Halliburton Stock Offers an Unusual Contrarian Opportunity for Daredevils

After months of tough rhetoric and a spiraling geopolitical crisis, cooler heads have apparently prevailed in the Iran crisis, leaving Halliburton (HAL) in an odd position. In large part because of the escalating tensions, HAL stock soared. And while it’s still performing well on a year-to-date basis (up almost 17%), the security finds itself down nearly 19% in the trailing month.

Worse yet, the negative acceleration has been so bad that HAL stock has ignominiously earned a Weak Sell rating from the Barchart Technical Opinion indicator. Caution is understandable given how interconnected Halliburton is to the geopolitical narrative. In a nutshell, the closing of the Hormuz strait led to international oil indices shooting higher, in turn raising the West Texas Intermediate (WTI) price.

Now, with tensions starting to smooth over (relatively speaking), WTI has suffered a downturn. And because Halliburton is heavily leveraged to short-cycle North American shale (where operators can stop or start drilling within weeks), a drop in oil prices leads to immediate domestic budget cuts. Subsequently, producers slow down their completion and fracking schedules, directly hitting Halliburton’s core revenue driver.

Naturally, many investors are seeing the writing on the wall, leading to the sharp selloff in HAL stock. However, Halliburton’s most recent earnings report gives some hope for contrarians. Primarily, the oilfield service provider enjoyed strong international activity and saw early signs of a North America recovery, thus offsetting disruptions in the Middle East.

Another point to consider is that Halliburton kept its Middle East crews and equipment in place rather than pulling back. This bold decision may allow the company to be in a better position relative to the competition to catch demand in the region once it returns. Therefore, HAL stock might not be a complete bust the way some skeptics might view it.

Valuation Argument Offers an Enticing Angle for HAL Stock

One immediate consideration for HAL stock is the sudden loss in market performance. Since HAL trades at a trailing-year multiple of around 18x — while the oilfield services sector trades at around 33x — there’s a coiled-spring argument to be made.

Personally, I don’t find this to be the most convincing argument. However, there’s something to be said about the concept. With HAL stock suffering significant red ink, there likely needs to be more aggressively substantive bad news for the security to continue on its downward trek. But because the bears may be exhausted, any bit of good news could have a disproportionately positive impact on HAL.

Thanks to new technologies in the financial analysis industry, we can objectively observe these theories rather than just opine about them.

Using a dataset going back to January 2019, we can calculate the expected nominal return of a random long position in HAL stock held for a 10-week period. Such traders can expect a forward distribution between $32.60 and $33.60, with probability density peaking just north of $33 (assuming a starting price of $32.96). Basically, Halliburton enjoys a modestly bullish bias.

However, we’re interested in how HAL stock trades given how a specific bearish cycle responds to the mean-reversion theory. In this case, HAL printed only three up weeks in the last 10 weeks, leading to an overall downward slope. When data is conditioned for this 3-7-D sequence, the expected forward 10-week distribution lands between $30 and $36, with probability density peaking at around $33.50.

That’s a slightly better distribution than the random baseline but the variance is not positive enough to justify a 10-week hold. Nevertheless, the expected distribution isn’t linear. Instead, we observe that in the first three weeks following the flashing of the 3-7-D sequence, HAL stock tends to rise higher than the random baseline before succumbing to sub-baseline performances in the later weeks.

Notably, Halliburton will release its second-quarter earnings report on July 21, which could potentially provide a catalyst for HAL stock.

An Aggressive Idea to Consider

If we were to give weight to the inductive model above, the 35/36 bull call spread expiring July 24 arguably looks the most tempting. Under normal circumstances following the 3-7-D signal flashing, the $36 price target would be considered a realistic median expectation. If HAL stock rises through the second-leg strike at expiration, you’d be looking at a maximum payout of over 163%.

Adding to the temptation, the net debit required per spread is only $38.

It must be said, though, that inductive models suffer from a core problem: no amount of past observations can logically guarantee a future outcome because we cannot assume the uniformity of nature. In this case, just because the observed signal leads to an above-average performance of HAL stock in the first three weeks does not mean it will be so in these next three weeks.

That said, my defense is that my model is based on actual, conditioned observations rather than relying on the affirming-the-consequent fallacy that traps many technical frameworks. So, if pattern recognition holds true again, HAL stock could be an intriguing idea for aggressive speculators.