6/15/14
Back
on April 6th, I recommended buying General Motors (GM) because I
felt all of the bad news about recalls and possible lawsuits was already priced
into the stock. At that time, the
stock was trading at $34.81, and while GM fell down to $31.70 a couple weeks
later, you would still be up about 2.5% since I recommended it. GM closed Friday at $35.63,just above
the 38.2% Fibonacci retracement of $35.23. If you missed the recent drop in GM, I think you can begin
building your position in the stock this week and complete the position if the
stock sells off close to $34. GM’s
reputation hasn’t been affected as much as many investors thought it would, as
evidenced by it’s May sales which increased by more than 12% YoY, and I think
the stock goes back up $40.
That
brings me to the topic for this week, which is, when you have a high quality
stock that sells off sharply because of a negative event, it’s almost always a
good idea to buy and hold, rather than sell. On December 13, 2013, Anadarko Petroleum (APC) cratered,
closing down 7.5% to $78.30, after news broke that Anadarko would be forced to
pay a $10.459B bankruptcy settlement, a much larger figure than the market
priced in. Had you bought the
stock on December 13, you would have been profitable almost every second of the
time you held the stock. Anadarko
Petroleum closed on Friday at $109.37, up about 40%, and hitting a new all-time
high.
Back
in June 2010, BP hit a multi-decade low of $27.02 in the wake of the April
Deepwater Horizon oil spill. By
late June, all the negative news, including the lawsuit that was expected was
already priced into the stock. Had
you bought BP in June 2010 and held it through today, you would have about a
93% gain, with BP closing on Friday at $51.68, it’s highest level since the May
2010. Anyone who sold on that
news, or avoided the stock because they thought it would go to zero, ended up missing
out on some big gains.
Last
July 30th, stocks like Potash Corp. and Mosaic Co. sold off drastically,
dropping 16.5% and 17.7%, respectively.
On July 29th, news broke that Russia’s Uralkali was quitting
one of the world’s two biggest potash cartels, which would open up a huge price
war for potash. Had you bought
Mosaic and Potash on that news instead of selling, you would have an 11% and
14% gain in each stock, with both stocks filling in the gap on the chart that
was made on the morning of July 30th.
How
do I identify if I should buy the stock, and/or when I should buy a stock that
gets hit hard on negative news? If
I see a stock that has strong long-term fundamentals that sold off because of
an isolated negative event that probably won’t have a long-lasting impact on
the company, I would be looking to buy.
General Motors is the largest automaker and there’s no way that GM is
going out of business. Toyota
Motors had a larger recall that GM a few years ago and they seem to be doing
just fine today. What you want to
look for in price action is a capitulation day, which usually indicates panic
selling. Investors sell huge
volume in the stock to get out, before really thinking about the long-term
affect. In the case of Potash and
Mosaic, the stocks opened on July 30th down more than 20% from the
previous close. Both stocks
rallied all day, closing near the highs of the day on massive volume. 106 million shares of Potash were
traded on July 30, when the average daily volume is under 5 million
shares. A day like that is what
investors look for to determine capitulation and will use the low of that day
to buy against. On December 13,
Anadarko Petroleum opened at $73.60, which was not only the low of the day, but
the lowest point all year, only to close about 7% higher. That day, more than 38 million shares
changed hands, when on average, volume doesn’t get much higher than 5.5
million.
You
never know when a major lawsuit or negative event will happen or to which stock
it will happen to. But it’s always
good to keep some cash on the sidelines, waiting to take advantage of the next
Anadarko Petroleum or BP. When you
see a large sell-off, make sure to think before acting. Take a look at the volume and look for
a stock that opens at or near the low of the day, but closes near the high of
the day. If the underlying company
is one that will be around for the long haul, you have should be looking to be
a buyer.
My current positions: Long
Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation
(SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Disney (DIS), Google (GOOGL),
Facebook (FB), short WHEAT.
Jeff Lewison
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