Back on February 22, 2016 I bought Transocean Partners LLC (NYSE: RIGP).

I picked it because it was the cheapest stock at the time in our “All Investable Stock Screener”, which you can register for here. As you can see from the chart below, the stock price had been hammered, down almost 49% at the time I bought it. This is exactly the type of ugly and out-of-favor stock that value investors love.

(SOURCE: Google Finance)

(Source: Google Finance)

Here’s what I wrote at the time:

How does it look in the Screener?

Let’s take a closer look at Transocean in the “All Investable Stock Screener”.

The company currently has a market cap of $534 million, while its Enterprise Value (EV) is significantly lower at $394 million.

The reason its EV is so low is because the company has an excess of $140 million of cash and cash equivalents once you subtract its total debt. As a acquirer, we subtract this $140 million from the current market capitalisation of $534 million, which leaves us with a total EV of $394 million.

The company’s operating earnings, which are taken from the top of the income statement, are$216 million.

In other words, we’re paying $534 million for a company with an EV of just $394 million, that is returning operating earnings of $216 million on that $394 Million.

This gives us an Acquirer’s Multiple of 1.83, when we divide the EV ($394 million) by the operating earnings ($216 million).

Why has the share price been dropping?

Transocean Partners LLC owns, operates and acquires offshore drilling rigs. Its assets consist of 51 percent ownership interest in each of the entities that owns or operates the three ultra-deepwater drilling rigs operating in the U.S. Gulf of Mexico.

The company’s operating earnings were down a staggering 533% for the 3 months ending September 2015, compared to the pcp (previous corresponding period). Here’s all you need to know:

(SOURCE: NASDAQ.COM)

(SOURCE: NASDAQ.COM)

The problem for Transocean is simply that oil prices are currently sitting around US$33 and they’re not showing any sign of recovery. That means that energy companies slash their capital budgets, resulting in fewer contracts for offshore drillers. Offshore drillers then churn through their backlog, and their revenue declines.

This is typical of any company whose share price is tied directly or indirectly to a commodity price. Offshore drillers have been hit hard by the drop in oil prices. In early 2015, it looked like $100 per barrel would return by the end of the year, but instead the year ended with oil near $35 per barrel.

This is the type of news we love as deep value investors. Scary isn’t it!

Now, have a look at what happened since!

Here’s what happened to the share price of Transocean since the purchase in February this year. As you can see from the chart below, the share price has risen 120%.

(Source: Google Finance)

(Source: Google Finance)

The reason. Well there a number of reasons but, take a look at the price of oil over the same period.

(Source: Nasdaq.com)

(Source: Nasdaq.com)

As you can see, in the same time the price of oil has risen 60% from $33 USD/bbl to $53 USD/bbl.

The point of this article is not to show you what a great stock picker I am. It’s simply a great illustration of what you can achieve by following an evidence based strategy, like the one we use here at The Acquirer’s Multiple, that requires you to pick ugly and out-of-favor stocks that no-one else wants.

Your chances of achieving outstanding returns by chasing the current ‘market darlings’ will inevitably lead you to a life of under-performance.

Don’t forget to check out our FREE Large Cap 1000 Deep Value Stock Screener at The Acquirer’s Multiple.

The Acquirer’s Multiple®