What To Do When Your Stock Crashes

| About: Pandora Media (P)
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I think I bring considerable value to Seeking Alpha, particularly in discussions about basic options and more qualitative takes on spaces such as new media, Internet and retail. That said, we run in subjective circles here, so I can certainly understand if a few dozen folks disagree with my self-assessment. That said, you'll be hard-pressed to find a writer on this site or elsewhere so willing to discuss his own portfolio, particularly when things are not going so well.

There's a simple reason why. In all of life's ventures, particularly investing, you're going to be wrong quite often. More often than not, you move between being wrong and right. And you can argue this or argue that until you're blue in the face, but, as Billy Joel says, life went on no matter who was wrong or right. Plus, my experience investing in the stock market has shown that, if you stick to a logical and coherent plan, over time, you'll do well.

Overall, I am happy with how things are going. I expected this pullback we're experiencing. In fact, I consider it a good thing. I am more than comfortable with my core portfolio of mid- to large-cap dividend-paying stocks. I am even quite comfortable with my speculative positions.

There's one, however, that would give anybody a pause. That's Pandora (P). It breached $10.00 on April 4, closing at $9.92. As of intraday Tuesday, it's down about 12% from that sub-$10.00 finish. I am in the stock with a cost basis of $11.10.

In this article, I discuss why I think the stock is getting hit so hard. I close by assessing what to do when your stock crashes.

Plenty of investors have very little faith in Pandora's long-term prospects. Despite a bearish overhang, the analyst community has not been all that hard on the stock. In recent weeks, it has received mostly favorable reports, however, it's been the target of several sell recommendations, including one from Jim Cramer on CNBC last week.

A larger share of the pressure, however, likely comes from the disclosure of recent insider sales, totaling more than $2 million between six different Pandora directors and executives. You can always take the easy route and argue that if the insiders are selling, why would you be buying. As I noted earlier this year in a post at Robert Weinstein's Paid2Trade, that's a simplistic approach that ignores the reality of executive compensation:

IPOs are designed for insiders to sell shares - sometimes once or all at once, sometimes over time - so that they can get paid. It happens in a variety of different ways. It happens like it did at Pandora. It happens like it does at Netflix (NFLX) with top executives cashing out options on a regular basis. Go way back and review the history of Amazon.com's (AMZN) insider sales. Pick a ticker, particularly an IPO from the last 20 years, and review the insider transactions ...

Because Pandora insiders exercise options and/or sell direct stock does not mean the company is a losing proposition. It's of no greater magnitude than Mel Karmazin getting richer on the backs of SIRI shareholders . That's one way he gets paid. That's how a vast majority of modern day executives get a significant chunk of their loot. Some "deserve" it, others do not. But that's not the point. It's like arguing over whether or not Scott Gomez deserves $6 million a year from the Montreal Canadiens. Bottom line, for better or worse, he gets it and people like him will continue to get it until some sort of profound change happens, if ever.

Just as I argue in relation to Sirius XM in my latest Seeking Alpha article on the company , the issues with that stock (outstanding shares, etc.) and company (i.e., my long-term bearish concerns) will take care of themselves if the company executes. The same goes for Pandora. If you believe for a second that somebody like Tim Westergren founded this thing 10-15 years ago, only to cash out a few shares of stock 10-15 years later (when he's probably already loaded anyway) and proceed to drive his company into the ground, you're either plain wrong, reckless or just being disingenuous.

And I stick by that during this most recent batch of sales. All you need to do is to go to the SEC's Website and review archived insider transactions for stocks like Amazon.com or more recent activity involving battleground stocks such as Netflix and Sirius XM (SIRI). Insiders have unloaded and continue to unload in a variety of different ways. That's the way the business works.

I would have not had any problem with Reed Hastings' options-related compensation if his company was not busy buying back shares at the same as time as it was running headfirst into a cash crunch. I do not have a problem with Sirius XM CEO Mel Karmazin selling. Nor do I take exception to Tim Westergren and others getting in on the action at Pandora. I would do the very same thing. After all, it takes a good chunk of change to buy that Victorian you have your eye on in Pacific Heights or that penthouse apartment in Midtown.

Ultimately, I consider most, though not all, insider selling a non-factor. At the end of the day, driven folks like Hastings, Karmazin and Westergren want to succeed. While we might not always agree with the decisions they make or believe in the businesses they run, individuals like them are all pretty darn sharp in their own unique way. If they and their teams can execute, chances are their company's stock prices will follow, regardless of their personal situations.

If Netflix becomes the next HBO, we'll likely forget all about Hastings' borderline-obscene options exercises. If Sirius XM continues to grow subscribers, nobody will even think twice about Karmazin's plans for his new-found wealth. And, if Pandora's multi-platform, targeted ad revenue goes through the roof, we'll come to realize that standard-issue insider selling was never intended to signal long-term bearish conviction.

All of that said, if you're a retail investor, executives and other insiders get rich even as their companies' stocks plummet. Netflix, Sirius XM and Pandora provide three excellent examples. Hastings presided over one of the most pathetic stock implosions of the new century as NFLX bombed from over $300 a share to under $100. On Karmazin's watch, Sirius XM has tanked, yet he still considers himself underpaid. And Westergren and CEO Joe Kennedy's company is off about 66% from its introductory 52-week high of $26.00.

While plenty of folks made money investing in NFLX and SIRI and trading in NFLX, SIRI and P, quite a few were left - and are left - holding the proverbial bag. So, without the luxury of being granted options at a fraction of a stock's market price and turning around and selling them for a windfall, what do you do?

First of all, I never take issue with somebody who decides to sell. I have done that many times over the years. Often, I made the correct move because the stock never ended up going anywhere. Sometimes, I should have kept buying. Petsmart (PETM) comes to mind as I stock I owned at about $5.00 in 2000 but sold as it stagnated. Sometimes, the best course of action is to simply move on.

But, as I noted earlier this month in a Seeking Alpha article about "averaging down":

I bought P for as high as $15.16 and as low as $9.92. I stepped up the level of last week's buying with an unscheduled purchase when the stock breached $10.00. From the moment I got into a position in this stock, I, barring some major change in Pandora's long-term story, committed myself to it. I believe in the company's future as it redefines "radio" and snags a meaningful share of exponentially growing mobile ad revenue.

Additionally, I have a long-term time horizon both on the stock and with regards to when I "need" my money. I allocate a good portion of my aggressive dollars to Pandora, but it takes up a relatively small percentage of my overall portfolio.

You can certainly call it rationalizing, but I spend less on P stock each month than most people spend to pay for and maintain an automobile. I live in such a way that, each month, I can put a considerable amount of money into my investments. I concentrate most of that cash in the dividend payers, but the small chunks I throw at stocks like P and Wendy's (WEN) add up considerably over time.

When a stock tanks, speculative or otherwise, I yawn and think back to the reasons why I entered the position in the first place. Has anything changed? In Pandora's case (as well as Wendy's), I come back with a resounding no. Every part of the long-term story that makes me bullish Pandora remains intact. The mobile ad and multi-platform, targeted digital landscape Pandora has only begun to leverage did not dry up overnight. I'll wait for the dust to settle on the broader market pullback and step up my regular buying of the stock, just a bit, later this week or next.

When Pandora rises, it tends to do so with force, jumping more than the market on its strong days. It's the nature of that type of stock to perform the same way to the downside. Buying a speculative stock carries with it considerable risk. It's not a one-way, non-stop flight to riches. When turbulence hits, you simply have to reassess your position and see if anything meaningful changed. Looking at Pandora, with the exception of short-term - and expected - noise leading to scary-looking carnage, nothing really has.

Disclosure: I am long P, WEN.

Additional disclosure: I am long NFLX June $40 put options.