July 30, 2006
Rambus ran up from $10.22 in September 2005 to $46.99 in April 2006 amid optimism over its patent litigation claims. Shortly thereafter, the extreme bullishness began unwinding, crashing it all the way down to $15.65 today. Lower lawsuit payments and the announcement of earnings restatements due to backdated stock options severely shattered the stock. On the day Rambus announced the stock options issue, the stock fell 14.4% to close at $16.77.
Marvell Technology fell almost 8% due to its backdating news on July 5, to a split adjusted $20.66. The stock continued to falter all the way to $16.71 on July 24, rebounding to $18.31 since. These fluctuations emphasize the importance of staying on top of market trends. It’s not necessary to sell away shares of a company due to backdating stock options alone – it may already be too late to sell at a decent price, and the hard-hit stock is bound to bounce back at some point like Marvell. A few companies can even catch a lucky break like Mercury Interactive (MERQ), which got a takeover offer from Hewlett-Packard (HPQ) despite its accounting issues.
Quick and agile trades need to be made occasionally, especially during earnings season. Often times, when a company reports good earnings that surpass expectations, it will shoot up in after-hours trading, and then extend the gains during regular trading the next day as they get lauded on Wall Street with upgrades, price target increases, and increased earnings estimates.
The opposite also holds true when companies fail to meet expectations and are left at the mercy of Wall Street. When internet behemoths Yahoo (YHOO) and Amazon (AMZN) reported less than spectacular figures, they both fell 13% and 11% respectively at the end of after-hours trading. Both companies declined a whopping 22% the following day, highlighting the benefit of quickly dumping losers.
Warren Buffett employs a different strategy with his investing: finding a good company and sticking with it. Buffett’s philosophy is of finding value stocks that are performing well, avoiding debt, increasing profit margins, public longer than 10 years, setting themselves apart from the pack, and have low premiums to their actual value. Stocks like American Express (AXP), Walt Disney (DIS), and Coca Cola (KO) helped Buffet score big returns in the past and paved his way to fame. Recent picks like Anheuser-Busch (BUD) represent the value perspective of Buffett, but haven’t had the splash or performance his earlier picks had.
Stocks rise and fall daily, experiencing many upward and downward trends throughout the course of a year. Although it is impossible to guess the exact nature of these moves, it is possible to make educated guesses about where a stock is headed, and act on that intuition. Trading is vital to outperforming the market, and even outperforming an individual stock. While you will inevitably miss the full potential of a runaway stock that rockets skyward, you can smile knowingly when it comes back down to earth. After all, you are buying in the first place to sell higher, so why not do this before it’s too late?
< 1 2 >
At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.