WARNING: Fallen Stocks Can Always Fall Further
From: Nicole Urken
Sent: Tuesday, October 25, 2011 2:05 PM
To: James Cramer
Subject: RE: FSLR
Stock down big as CEO leaves. You can still lose money from the losers !
From: James Cramer
Sent: Tuesday, October 25, 2011 2:07 PM
To: Nicole Urken
Subject: RE: FSLR
Right – exactly what we’ve said
There has been much written in behavioral economics about the notion of loss aversion in humans—i.e., the unwillingness to sell shares if doing so would result in a nominal loss. This difficulty for humans to deal with loss is precisely why on "Mad Money" we always stress where a stock is going vs. where it’s been.
Just two weeks ago, we did a segment on First Solar to highlight the dangers of the story. Why would we have taken the time to highlight a name that had already fallen about 60 percent to the mid-$50s since we sentenced it to the sell block when it was above $130 in September 2010? Because the recent positive murmurs from analysts and talk of the stock as a take-over candidate were exactly what you have to worry about in a name that seemingly presents a value-oriented opportunity.
The dynamics of the solar industry—including too much supply and headline overhang from the Solyndra scandal—have remained poor and have been reflected by poor reports by a number of names in the cohort. Above all else, the reliance of the industry on subsidies is particularly risky given the cash-strapped nature of governments in the US and Europe. Fiscal constraints alone are a reason to stay away.
The 25 percent drop in First Solar Tuesday to the mid-$40s validates the purpose of this segment last week—that even a fallen name can cause more pain if you hold on too long.
Similarly, when a company has “hair” on it — i.e., is a messy story—you want to stay away. After all, bald is beautiful on Wall Street … Just take a look at the top CEOs!
Case-in-point: Netflix . This once-clean momentum darling became a story with “hair” when it announced its pricing changes in mid-July. If you haven’t been following what has happened in the stock, you’ve likely been living in a cave somewhere, given how public the pleading letters from CEO Reed Hastings to customers have been.
Ultimately, the extreme moves in this stock, and its management mis-steps, are likely to become a major Harvard Business School Case Study. The big lesson, of course, is about understanding the price elasticity of a loyal customer and subscriber base. And, from an investing standpoint, we learned the moment we saw outcries from Netflix subscribers on Twitter, Facebook and beyond in response to the price hike, it meant it was time to sell.
Lesson? Never second guess the customers of a consumer-oriented company ... and never put too much faith in the CEO, even if he or she has a strong track record.
But another key lesson is introduced: Never overstay your welcome in a battleground name, even if you have experienced losses.
On "Mad Money," we didn’t sell at the top right when the outcries from disgruntled customers began in mid-July—and this was wrong. For that, Jim wore a post-it—a ritual from his hedge fund to remind us to learn from mistakes.
While we always recommend taking some off the table after a big run (don’t be a pig!), we were wrong not to sell fully in the high $200s. What we did right, though was to step away in mid-September when Netflix was at $150. We did cut our losses—as painful as that was. Our acknowledgement in September that a fallen stock can fall further allowed us to cut further losses … and allowed us to preserve at least some of the profit since our initial $50/share recommendation of the stock.
While cutting losses when the stock was below $150 at the middle of last month was painful, considering that it had come down from $300 in July, the levels under $90 Tuesday are case-in-point why you have to bow out when there is no real catalyst for upside … and instead, only questions. And that is why the September 15th "Mad Money" segment emphasized throwing hands up on the name and stepping away.
Interestingly, Netflix did tick up Tuesday after long-time bear Whitney Tilson (who emotionally caved near the top and covered his short) announced that he is now long on the name. Investors seemed to discount the fact that, while his last thesis was on point, he got the timing completely wrong last time around (and timing is everything when it comes to momentum names). While Netflix would likely have risen on anyone buying in at this point, the stock still lacks catalysts … and, like Tilson, is still an emotionally-driven stock.
The bottom line: Always look ahead and not back. Keep the emotions out of investing –-that is the way to outperform the indices and to protect yourself from, well, yourself—after all, you can be your own worst enemy.
"Inside the Madness" appears Tuesdays and Thursdays at madmoney.cnbc.com
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