It’s often said that logic can lead
you down the right path in life. When the
right choice seems to be right there in front of you, it’s hard to take another
Shares of Titan Machinery (TITN - Free Report) recently
dropped from $32 to $22 after the company reported and are now looking
attractive to some investors (perhaps a logical choice), but I wanted to check
that logic and make sure that we are all on the same page.
My colleague wrote about Titan just
a week or so ago and did an great jobs at offering the facts. My goal is to address some of the nuances and psychology
that goes into buying stocks on weakness and why it might not always be the
best thing to do (even if it seems like a great deal).
Tracey discussed how some traders
thought TITN might be a good long term buy and perhaps shorter term traders
might be better off with a stock like CNH Global CNH.
But for you longer term players, the
question you need to ask yourself is not just how long you are willing to wait,
but how much pain will you endure before you bail on your investment.
The Psychology of a Selloff
We all have different time horizons and
goals when it comes to investing. Some
look for a quick pop over a week, others are committed to years in a stock (not
so much anymore).
When stocks like Titan go through a poor
earnings report and offer poor guidance, shares can often get hit hard. Then usually you’ll see what we pro traders
call a dead-cat bounce (graphic I know), as plummeting shares see a rash of
buyers looking to pick up the scraps.
In the case of Titan, you can to
look at how the industry is changing, global economies are faring and what is
happening to the price of commodities. The third miss in a row for Titan should tell
you that things have been going wrong for a while and that dead cat bounce
might rollover once again.
Look at peers like Caterpillar (CAT - Free Report) , which is a Zacks Rank #5 strong sell; while they also manufacture and
sell similar equipment, they are in a parallel business with even broader reach,
their stock has been getting pummeled as well.
Then if we examine the commodities
themselves and their trends, it again becomes very difficult to justify an investment
in TITN. The PowerShares DB Agriculture
Fund (DBA - Free Report) is an ETF that holds soft commodity futures like sugar, wheat, corn,
cotton, etc. Shares of that ETF have
been dropping since September of last year and don’t appear to be relenting any
If bigger and stronger peers are
showing weakness and the sector’s lifeblood (commodity prices) are moving
lower, chances are that 2nd tier companies like Titan will suffer.
Titans Pain May be Long Lasting
Sure Titan’s shares are back down to
December 2012 levels and their forward P/E of 10 may not seem all that high,
but what if sales continue to melt down?
Analysts still expect almost 36%
revenue growth to drive 19% in earnings growth in 2013. Those are lofty expectations in a weak economy. If those numbers continue to deteriorate, the
shares will most likely do the same. As
the company and their peers have stated, they see clouds ahead; these are not
the words you want to hear if you’re buying for the long term.
If you’re banking on the U.S.
recovery carrying the stock, remember that our economic growth is just barely
hanging on and we are actually 5 years in our current growth cycle, which some people
seem to forget.
When that cycle peaks and begins to
move into contraction, you can be sure that stocks will be the first to react
as they often are. 5 years is the
average growth cycle.
Instead of jumping on a stock with
fundamental flaws because it seems cheap, find a high quality, value stock that
might be going unrecognized.
It can mean the difference between
pain and profit.
A Levy is one of the most highly sought after traders in the world and
member of three major stock exchanges. That is why you will frequently
appear on Fox Business, CNBC and Bloomberg providing his timely
other investors. He has written and published two tomes, “Your
Options Handbook” and “The
Bloomberg Visual Guide
You can discover more of his insights and recommendations through his
portfolio recommendation services:
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buy stocks likely to have robust earnings BEFORE they report.
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Jared A Levy on twitter at @jaredalevy
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