Thursday, February 9, 2017

Down 40%!? [LNKD example]

     Aha, misleading title. This isn't about a specific stock that's down 40%. You didn't miss any huge news. No worries. I wanted to talk about losing 40% as a short term buying opportunity. If a stock falls 40% in one trading day, wouldn't that seem like a great opportunity to buy? Sometimes. To buy that stock there would have to be certain things you believe in and certain things you look for. 

     First of all, you can't believe in the efficient market hypothesis. The EMH. I don't because it's silly. It basically assumes that all people are acting rational and the stock prices reflect the rational public and all past pricing, volume, and public information. The biggest issue I have with that is acting rational. People inherently don't do that. There is the argument that one person acting irrationally has an opposite party acting equally irrational and therefore is efficient. I don't believe that. For instance, when a stock price drops by 40% (40 is an arbitrary number I picked. It's a big enough drop where it may indicate uncertainty and people getting scared) usually not all of it based on the news. 

     For example, take Linkedin [LNKD] back on February 4th, 2016. They closed at $192.28 and closed February 5th, 2016 at $108.38. That is a -43.63% drop in one day. It fell to as low as $99.95 on February 12th before it started to recover from the over reaction. Let's say I decided to buy the stock on the 5th at the close price listed above, $108.38. If I held the stock until June 13th, 2016, 4 short months, I would see LNKD close at $192.21. Just 7 cents short of making the whole drop back. 

     That being said, it is important to look at the causes that forced the stock to drop so far. In a lot of cases, whether a bad earnings, or a CEO unexpectedly quit, it is exaggerated. With that in mind, one would think that in the next few days or weeks the price would rebound and reflect a truer value. Sometimes the 40% drop is for good reason. Maybe you're looking at the news or the financials and see bankruptcy on the horizon. In that case don't buy it because why. 

     During 14 days in September 2016 I kept track of the 5 worst performing stocks that day in the market. (Based on finviz). I don't have the specific percentage lost so the data may be skewed, but I figure if I look at the top 2 of 5 stocks that lost the most on that day I may see a small pattern. The data is between the days of September 8th through the 23rd. I tracked them for a random 88 days and finished it up on February 2nd. I think that adds up? If not the days are off but that really doesn't matter. Here are the results.

TSCO +9.47%                    BMI +14.47%
PIR +109.56%                    TTC +25.02%
LNTH +20.97%                 ASNA -12.30%
GERN -11.30%                  MSTX +16.67%
AMTX +40.00%                MIRN +5.50%                               
AGTC -2.78%                    OMN +33.33%                             Average Return = +2.17%
TANH -10.09%                  GBSN -99.87%
OPXA -71.74%                  ENPH +33.33%
RFIL -5.56%                      RAVE -7.77%
BIP +8.10%                        PTIE -57.89%
UUUU +30.18%                DRRX -8.62%
NVAX +4.65%                   CZR +17.27%

     While the return is pretty negligible, it is still positive. For doing no research on any of the stocks theoretically bought and still coming out positive is shocking to me. You should do research on the company and its financials to make sure it isn't going out of business. Hopefully then you can avoid some of the 99% losses or 71% losses. 

     All told, watching for the huge daily losses as as way to take advantage of short term opportunities. It can be dangerous though of you willy nilly buy. 

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