China Digital TV Holding (STV) posted a strong quarter of earnings last Thursday, November 15, beating Wall-Street's consensus: 14.4 millions revenues, a 37% growth and an earning per share of 0.20. However, with a pre-earning stock price surge of more than 18% amid the anticipation of a superior quarter of earning, the stock experienced a huge sell-off which started right after the earnings release with the company guidance for the next quarter. The sell-off continued on Friday, as the market was still overshadowed by the credit crunch and rising energy prices where the Fed has not responded adequately with any comments but a concern for stagflation. With Swiss Re taking a hit from the credit woe and Citigroup (C) downgraded by Goldman Sachs to a Sell, the Dow downed 218.25pts, (1.66%). NASDAQ also went down by 43.86pts (1.66%) while S&P fell by 25.47pts (1.75%). The volatility of the markets as a result of serious concern about the upcoming bearish market and heightened worries of inflation drove the investors away. With all industrial sectors turning red yesterday, STV was down by another 11% from the 16% drop on Friday, from a stock price of 38.50 to 28.31 as of market close.
So what makes a strong growth company like STV, with significant and steady flow of revenues in the absence of debt leverage, fall down so much, especially with a strong earnings report posted?
I believe the reasons for its decline are macroeconomics at play; looking at the current U.S. economy, we see slow industrial growth, weaker dollars, and surging energy prices; with the burst of the housing bubble over the summer, investors sentiment is at all time low. Many investors have pulled their money out from equities and put them in a safer place such as bonds, which are now trading at a premium. Economic concern is one major driver which drags the U.S. market down, and in effect, drags STV down; investors are losing faith in equities, especially considering that the PRC government further froze lending yesterday to prevent capital outflow to outside markets, which worsens the effect on Chinese companies listed on the U.S. exchanges.
In the face of a potential bear market coming up and the Thanksgiving holiday, investors are likely to withdraw their money from the market either by cutting losses or taking lesser profits as they prepare for the holiday shopping season by safeguarding their leftover assets from possibly being wiped out in a raging bear market.
So should we invest in STV? Yes, if you are investing in the company for long term growth and no if you are trying to speculate the stock movement of this particularly volatile company. Day-traders shorting this stock have had a handsome profit over the last two trading days and they are ready to take profits and cover their position because of the increased volatility swinging both direction. Do I see the bottom of this stock? I want to say no, but there is an unrest feeling that the speculators will be taking advantage of the market volatility and lower investor sentiment which may depreciate the stock price. STV has a higher than industry P/E ratio; although that is not necessarily bad, it means it may be the first to get hit from the market correction of a forthcoming bear market.
"People who are taking long position are in great pain right now", said investors who got in on its IPO day as the stock price essentially hit below its trading price when it was first offered to the secondary market. However, holding onto this growth stock with strong earnings is by no means a bad investment. We have to realize however, that even great companies have their dog days; look at Apple (AAPL) and Google (GOOG). Now, in my opinion, it is the patience that will let you recover from the hit, but not a panic sale. Despite many people talking about how good the dollar cost averaging is in the down days, I would recommend keeping a portion of your readily available asset, cash, to get something for you and your family for the holidays. If we do not see any risks posted to the company, it will eventually go back up to a price that will well make your money worth.
Disclosure: Author has a long position in STV