Two items I hope you will find interesting today. First, a short investing video looking at the week ahead in the market. I also look at the RT, Relative Timing technique to find good stock candidates in Canadian Sectors and the US Overview WatchLists. Here is the replay link: Click for the Video Replay.
Next is my weekly essay published in the Friday VectorVest Views.
SHOPIFY BATTERED BY THE BAD NEWS BEARS!
No one likes bad news, least of all the stock market. Bad news that goes public, confirmed or rumour, can send a stock into a free fall. Remember Valeant (VRX)? Shares dropped 5% on September 21, 2015, when U.S. presidential candidate Hillary Clinton sent a tweet accusing Valeant and other Big Pharma of “price gouging.” VectorVest gave VRX a Sell REC the next day with price at $287.17 per share. By November 17, 2015 price had plunged to $93.57 per share. Today it’s at $16.71 per share.
Then there’s Home Capital Group (HCG). Even before the company’s bad news troubles began, VectorVest assigned a Sell rating on February 14, 2017 at $27.21 per share. On April 20, 2017, the Ontario Securities Commission alleged that company executives broke securities laws and misled shareholders in a case that happened almost two years earlier. HCG’s share price tumbled 21% to $17.71 per share. More bad news April 26, 2017. Price gapped down another 65% in a single day to close at $5.99 per share. Today HCG trades at $13.93 per share.
The worst kind of bad news comes from “short-sellers.” These are The Bad News Bears of the stock market. They are often accused, rightly or wrongly, of issuing reports that may be slanted to talk down the current and future value of a stock. Of course they often already happen to be playing the stock to the downside. Which brings me to Shopify (SHOP).
On October 4, 2017, short-seller Andrew Left of Citron Research attacked the high-flying e-commerce solutions provider. In a video release, Left said Shopify is, “a company that has mastered the good old get rich scheme.” While accusing SHOP of breaking the law, Left also said the company was worth a lot less than its current price. VectorVest actually agrees with that, never assessing SHOP’s actual Value at more than $17 per share, one of scant few cautionary signs on a stock fueled by momentum. Nonetheless, Shopify got battered by Citron’s report that seemingly came out of Left field (pun intended).
You can read the report yourself at www.citronresearch.com and you should do exactly that if you own the stock. Suffice it to say, Citron’s scathing report has left investors “holding the bag” as one of our subscribers quipped Tuesday during our weekly webinar. SHOP was at $145.70 per share on October 3, 2017. It closed Thursday, October 12, 2017 at $117.48 per share. VectorVest gave it a SELL rating Tuesday, October 10, 2017 when price crossed below its STOP Price, the rule for a Sell REC. VectorVest’s Stop Price is calculated by a 13-week moving average adjusted for the stock’s fundamentals of RV and RS.
Now listen, the brother-in-law hates bad news about his stocks. The way he deals with it, he will just block it out and ignore it. Not good. Don’t let that be you. You need to be alert to any bad news, and you need to deal with it. Don’t overreact, but do react. Do your homework. Study the VectorVest numbers for the stock, study the graph and look for a support zone, gather the news on the stock and the industry and digest it all. Then make a decision, including whether or not you should sell. One of our subscribers, writing about her trading plan in our VectorVest Canada Blog on Jan. 17, 2015, noted she has one over-riding rule: “BAD NEWS, BAD EARNINGS – SELL IMMEDIATELY.” Pretty good advice for risk avoidance.
However, if after your review, you still believe in the company’s prospects, you could determine a line in the sand sell price and wait and see. If you’re a Worry-Free Investor the way VectorVest teaches at its WFI Workshop, you could sell a Covered Call and use the premium to offset the purchase of a Put Option for insurance against a further decline in SHOP’s price. It’s called an Options Collar, and it’s an effective way to protect yourself from additional unexpected damage caused by The Bad News Bears.
Posted by Stan Heller, Consultant, VectorVest Canada
DISCLAIMER: The information contained in this Blog is for educational and information purposes only. Example trades and strategies must not be considered as recommendations. You should always do your own analysis and invest based on your own risk tolerance, investment style, goals and time horizon. There are risks involved in investing and only you know your financial situation, risk tolerance, financial goals and time horizon.