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 path.
Shares ofTitan Machinery
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 likeCNH Global
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 likeCaterpillar
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
Then if we examine the commodities themselves and their
trends, it again becomes very difficult to justify an investment
in TITN. ThePowerShares DB Agriculture Fund
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 time soon.
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
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
It can mean the difference between pain and profit.
Jared A Levy is one of the most highly sought after traders in
the world and a former member of three major stock exchanges.
That is why you will frequently see him appear on Fox Business,
CNBC and Bloomberg providing his timely insights to other
investors. He has written and published two tomes,
"Your Options Handbook"
"The Bloomberg Visual Guide to Options"
. You can discover more of his insights and recommendations
through his two portfolio recommendation services:
- Learn to buy stocks likely to have robust earnings BEFORE they
- Technical Analysis + Zacks Rank. Best of both worlds approach
to find timely trades.
Follow Jared A Levy on twitter at @jaredalevy
Like Jared A Levy on
CATERPILLAR INC (CAT): Free Stock Analysis
CNH GLOBAL NV (CNH): Free Stock Analysis
PWRSH-DB AGRIC (DBA): ETF Research Reports
TITAN MACHINERY (TITN): Free Stock Analysis
To read this article on Zacks.com click here.