Monday, May 17, 2010

This Day in Broken Momentum Stocks: (PCLN)

Despite seeing it hundreds of times, it is still breathtaking to see what happens when a momo stock - a stock that is teflon and can do nothing wrong, that simply rises day after day, week after week, where valuation means little - is abandoned. [Apr 29, 2010: When Momentum Stocks Attack: Green Mountain Roasters] [Feb 24, 2010: STEC - When Momo Stocks go Bad] A lot of money can be made on the way up, ignoring all warnings, and gleefully buying even more - but once the music stops the scramble for chairs in these stocks is a sight to behold.

Today's case study is (PCLN) one of our old holdings. More damning for the stock is this was not only a retail stock momo, but a hedge fund momentum stock - surfacing in the holding list of almost every major "growth" type of hedge fund. A disappointing earnings report (guidance) stunned the lemmings and once that 50 day moving average broke it was a straight line express down. Today, the 200 day moving average cracked and away she goes.

A very large European exposure is not going to help either - and this might be one theme we begin to see in the next 2-3 quarters; companies with large exposure to Europe (ash cloud, austerity, et al) provide some disappointing earnings reports/guidance.

Down here below $200, the stock is actually not a bad valuation with $11 in earnings power in 2010 (I'd assume $9-$10 worst case) but with every Tom, Dick, and Harry (and HAL) in Stamford, CT hitting 'sell, sell, sell' it is hard to stand in front of a freight train. The technical set up is also now a disaster so it's going to take time to turn this one around.

Netflix, Chipotle, Baidu et al - this is your future "one day". ;)

No position

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