If you watch CNBC, you've probably heard an analyst say something along the lines of...
"The time to buy is when there's blood in the streets."
Essentially, this means that bad news can be a buying opportunity.
At times, that philosophy is correct. But it's often better to wait for the impact of the bad news to become clear before buying. That approach explains why I recently told my Profit Amplifier readers that my indicator tools have a "buy" signal on mining giant Vale S. A. (NYSE: VALE).
VALE fell on catastrophic news in January when a dam maintained by the company in Brazil collapsed and killed an estimated 300 people. Dams are commonly used by miners to contain waste products, and Vale has more than 130 dams in Brazil. The company is now working to replace older dams with safer technology.
The collapse was absolutely a tragedy, and I do not want to minimize that fact. Vale will work with authorities and victims to resolve claims and address other concerns, as it should. However, my goal in Profit Amplifier is to recommend the best available trades with the highest potential, and VALE's stock is giving a "buy" signal.
The signal came after management addressed the outlook for this year. The company's iron ore production will drop by almost 20% as the focus shifts from production to risk abatement in some areas. But production will still be in line with last year's total... In other words, the worst case for the company appears to be "no change in output."
In a conference call with analysts last week, management said it would take accounting charges of about $124 million related to the dam collapse and additional charges of $260 million to $520 million to address concerns associated with other dams.
The stock moved higher on the news. My Profit Amplifier Momentum (PAM) indicator at the bottom of the chart gave a "buy" signal as traders responded to the news.
Now, traders could buy shares of VALE outright on the hopes of a rally. But I don't think that's the most prudent strategy, since this would involve tying up a lot of capital -- not to mention exposing all that capital to risk should the stock fall further.
Instead, I recently recommend buying calls on VALE to benefit from the stock's rally.
Based on the details of the trade I recommended to Profit Amplifier readers, we'd only risk losing about $95 on the trade for each contract, which controls 100 shares of the stock. And our target for this trade is a gain of 50%...
Now that the worst case is known, I think the stock is likely to move back toward $15 a share, a price that would be less than eight times this year's expected earnings. The deep value is likely to attract long-term buyers, and this trade is intended to benefit from that buying.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.