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 of Titan Machinery (NASDAQ:TITN) 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 like CNH Global (NYSE:CNH). 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 Sell-Off
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 like Caterpillar (NYSE:CAT), 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 well.
Then if we examine the commodities themselves and their trends, it again becomes very difficult to justify an investment in TITN. The PowerShares DB Agriculture Fund (NYSEARCA:DBA) 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.
Titan's Pain May be Long Lasting
Sure Titan’s shares are back down to December 2012 levels and its 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 term.
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 going unrecognized. It can mean the difference between pain and profit.
Read the full reports :
- Snapshot Report on TITN (email registration required)
- ETF report on DBA (email registration required)
- Snapshot Report on CNH (email registration required)
- Analyst Report on CAT (email registration required)