Although its always nice to see a stock perform admirably over a few weeks or months, it is always important to look at the reason for the rise. Was it fundamentals or the proverbial dead cat bounce that eagerly sucks in unassuming investors? For Netflix (NFLX) and Sears Holding (SHLD), the bounce has turned into a rapid free fall. One that does not lie solely with the recent market correction.
To give a glimpse into the dangers of turning a blind eye towards a company's actual chart pattern, one must look no further than First Solar's (FSLR) one year chart. After bottoming just under $30 in December of last year, the stock enjoyed a $20 appreciation in value within two months. Only to be left battling all-time lows now. For the investor that still waits, the loss has been astronomical. Still, it may be only a prelude to what sort of losses investors would rack up should they fail to see the future for both Netflix and Sears.
As for Netflix, after more than doubling in price between late November and early February, the stock finds itself once again testing $60. Except this time it appears only a matter of time before it finally breaks through to the down side. A major reason why is a result of earnings. After posting its first quarterly loss since becoming a tech behemoth, shares plunged 14% in late April. What's worse, the earnings picture doesn't get much rosier for the rest of this year. With expected EPS readings of $0.04, $0.11 and $0.04 for the final three quarters, there is a chance the company may report losses in any one or possible all three of those quarters. All this leaving the stock to quite possibly test $50 or lower by the time the summer market doldrums conclude.
A similar fate is also staring at Sears. Precluded by a significant sell off at the end of 2011 and benefited by massive short covering to start the year, shares tripled in price in a span of just over two months. After a turn back towards reality and with shares once again losing support at $50, though, investors are being presented their last opportunity to limit losses. Especially with two more quarters of EPS red arrows waiting down the road.
As a general rule, it can be agonizingly difficult to pull the plug on mounting losses and look towards the possibility of success, but often times common sense must outweigh emotion. After all, investors in these shares surely don't want to experience what those in First Solar have gone though.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.