"Buy low, and sell high" is the investing axiom that we all would love to live by. However, repeated market-timing wins are generally thought to be impossible. If anyone really knew for sure what a stock was going to do next, his or her wealth would be virtually unlimited. So, maybe we should all be worrying about our "time in the market," rather than "timing the market". Historically, an investor with a well diversified portfolio has done well over the long run simply by earning overall market rate of returns.
But what if we want to do better than the market? Can we find that stock to "buy low" that gives us better odds of being able to sell it higher down the road? Investors looking to do this should be jumping for joy when the market shows them companies that have declined more than 10% in a week. What seem like large share price declines are often really just small price corrections that occur as part of an overall movement in the market as a whole. For a long-term investor looking to find an entry point in an individual stock, these short-term price pullbacks are often a blessing in disguise.
That said, a serious decline can also signal something much worse. A company's fundamentals need to be explored when it has seen some serious price declines over a short period of time because a serious price decline can also signal something more sinister than a lowball entry point; it could just as easily be the start of a long downtrend in the stock's price or the beginning of the end of the company's success as a business.
The Bear Cave
In other words, any time one of your stocks takes a plunge to lower price levels, you should probably ask yourself whether there is something fundamentally wrong with the underlying company. (For further reading, be sure to see our article Surviving Bear Country.)
Let's take a look at five stocks that have experienced relatively large declines over the past week, but still have a bit of bullish sentiment in our Stock Picking Community. By exploring them further, and by trying to determine what caused their drastic declines, we can be in a better position to help predict which have a greater chance to provide investors with gains in the long run.
Bad Ratings
Share prices of Moody's Corp. fell drastically last week as investigations began into a computer error that caused the
rating service to apply improper ratings to be assigned to European debt securities, known as
constant proportion debt obligations. Shares fell from a high of $46.46 last Monday, to close Friday at just $34.16, on this news.
As financial markets continue to be bashed by the subprime crisis, we certainly did not need another bit of wrongly rated debt instruments to remove even more faith from our financial system. The
Financial Times reported this week that it obtained internal documents showing that the agency has actually been aware of this error since 2007, yet Moody's continued to rate these complex debt securities as
AAA until early this year, when downgrades were seen across almost all debt instruments due to market turmoil.
In a letter to customers sent on Friday, the
CEO of Moody's Raymond McDaniel, said that he will act "quickly and decisively to address any need for changes." McDaniel continued, stating that "it is inconsistent with Moody's analytical standards and company policies to change models and methodologies for any reason other than to improve the accuracy of our ratings."
It is admirable that the CEO would admit an error has occurred and take steps to fix it, rather than trying to pass the buck or cover it up. Reuters reported on Friday that Moody's has hired a law firm for the review of its rating processes. The bottom line is that it appears that something terrible has happened in this situation, and whether it was fraudulent or just simply due to incompetence, it seems that Moody's executive are doing what it takes to find out the truth.
No Bottom YetWith regulatory and legal risk now brought to the forefront of Moody's situation, I am wary of calling a bottom. That said, it has historically been a strong company, and should Moody's come out of this investigation smelling of roses, its share price could be poised to return to its previous highs. Risk of the legal nature, though, is dangerous, and we've all seen legal actions put a company out of business. Moody's could definely be a candidate for this situation, with
revenue growth already hurting from the ongoing turmoil in the financial markets.
Regardless, Moody's sentiment remains high in the
Stock Picking Community with 100% of the members liking its chances going forward. I agree with these members, feeling that when compared to everything that has happened in the financial community these past couple of years, this may be seen as a drop in the bucket. I will, however, wait to see what regulatory action ensues, before calling a bottom on this hurting company. (To learn how to assess which stocks are poised for a turnaround, read
Catching Comeback Stocks For Clients and
Turnaround Stocks: U-Turn To High Returns.)
Add Your Two Cents
What do you think will happen with Moody's going forward? Will the credit rating giant be able to regain it's reputation, and come back to reward it's loyal investors? Be sure to join me (
aytonmm) in the
FREE Stock Picking Community to share your thoughts and see what other investors are saying.