I Love Catching Falling Knives


FALLING KNIFE DEFINITION: A slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value, such as in the case of company bankruptcy where equity shares become worthless. A falling knife situation can occur because of actual business results (such as a big drop in net earnings) or because of increasingly negative investor sentiment.  Source: Investopedia

I do like the falling knives! I usually find the best opportunities in the companies who’s stocks fall hard, some deserve it, but sometimes is unwarranted panic selling. I got many of my current holdings this way. I bought the bulk of my Merchant’s during the last economic crash when all banks were being sold no matter how safe/dull their business practice was. Cisco (CSCO), Keurig Green Mountain (GMCR), GE (GE) Google (GOOG), eBay (EBAY), Apple (AAPL)… I bought my stakes in all of these when people were overly pessimistic on them.  

Why Catch Falling Knives?

Often, you will have companies have some bad news, maybe an earning or sales miss, an unexpected one time expense… temporary problems even though the company’s business is sound, the stock will drop hard. This makes for a great opportunity.

Some of the ones I’m looking to buy now are Staples (SPLS), Merchant’s Bank (MBVT), 3D Systems (DDD), Stratasys (SSYS), Amazon (AMZN), AT&T (T), Verizon (VZ), Sierra Wireless (SWIR) – either for the fact that they have fallen a bit, but still have sound fundamentals based on the current price or have decent dividends which help keep a floor on further downward pressure with great potential for upside.

But generally right now I’m putting together a nice list of potential ideas while keeping a wait and see attitude, waiting for the right time to strike.

MBVT is one that I’ve consistently held a core position while trading around it. I like it at $28.50 or less usually. At the last stockholder’s meeting (which I still need to post my write up on) they mentioned they are in the process of completely upgrading their computer system which will increase efficiency, customer service and lower overall cost. However, the whole cost of this upgrade is expensed this year so it could scare people (which it looks like is already happening) that just look at the numbers… could create a nice opportunity there.

eBay Inc (EBAY) – Sell

Sold a portion of our eBay (EBAY) position today.

While I feel that eBay is still a very strong business with good potential going forward I think that the current price to earnings to growth is getting high at this point (PEG 1.6).

However, I don’t feel it’s high enough to sell my whole position, as I believe that eBay still has some good growth surprises in store, especially with it’s Paypal business. However, there are uncertainties with the eBay.com business due to the mounting competition from Amazon, Google and traditional stores that will be a continual source of pressure on them.

Therefore, I am keeping my core position, but any future amounts I will want to get a good discount to help reduce the risk. I will need to determine at what price I would like accumulate more shares again.

eBay Inc (EBAY) – Buy

Ebay (EBAY) is one of the top shopping websites and I personally use them to sell goods and services and use Paypal significantly within my business and to make personal purchases.

While Ebay is a great service to the online community, which I use significantly in my own business, I feel that Paypal is their greatest opportunity for growth. The amount of payments I receive in my online businesses through Paypal is substantial and continues to grow and I use my Paypal card to make most of my purchases online and offline.

I consider the current downward pressure on the stock to be a great opportunity to pick up more shares in this great company at a great price.

Patience is a Virtue

When investing, you sometimes need patience. Especially when you invest in companies that are out of favor with wall street. However, it’s usually when wall street hates a stock, that it gets cheap. As an investor, it’s our job to research these stocks and determine which ones deserve to be down and which ones are simply a victim of an overreaction or loss of patience.

EbayTwo of my last investments fall in this category. Ebay (EBAY) and Microsoft (MSFT) both have been out-of-favor with wall street. Ebay has been down for what I believe are some misunderstandings by the media regarding their business, which if you researched you would have found they are stronger than wall street gave them credit for. There was also an over-reaction in the believe that Google Checkout was going to destroy Ebay’s Paypal business.

MicrosoftMicrosoft was simply a patience issue. Wall street was tired of waiting for new operating system and office software to come out. Wall street reacted as though they were never going to be released and so the stock was sold off very heavily. This posed a great opportunity for investors like myself to pick up some shares really cheap. However, for a while the shares did nothing, but the last 2-3 weeks have been great for both Microsoft and Ebay.

Labor ReadyA couple of my current situations that I believe to be similar are Labor Ready (LRW) and Sandisk (SNDK). They are both currently out-of-favor with wall street as their stocks are much cheaper than most stocks I watch. I imagine the Labor Ready is down due to fears that the recent minimum wage increase will hurt them and Sandisk is down to a current oversupply of chips, which they will most likely need to mark down to sell. I don’t think either of these problems are going to affect the companies in the long term. Both are strong and stable businesses. Labor Ready deals in temporary manual labor and they have minimal competition and they are very profitable. Labor Ready is expected to get a lot of work through post-Katrina construction. I think the wage increase concerns are overblown.

SandiskSandisk will simply discount their current stock and make more money on the forthcoming chip production. They continue to stay ahead of their competitors with new innovations and they have a ton of cash and no debt. With the increasing popularity of handheld electronic devices such as digital cameras, cell phones with storage, mp3 players, handheld video players there is going to be increased demand for small storage cards, which they’ve got. Sandisk’s cards are regarded as the most innovative and reliable. I would not bet against them.

Buying shares in either of these companies and waiting a few months or a couple years should pay off very well.

The bottom line is you must do your own research, don’t just take what the media and/or wall street says and you must have patience if you are going to bet against wall street.

Full Disclosure: I own shares in both Ebay and Microsoft. Sandisk and Labor Ready are potential new investments that I may or may not make in the near future.