Wednesday, December 10, 2014

Does it make sense to catch a falling knife?




People make money in the stock market by buying low and selling high.  This saying may prompt some people to buy stocks of companies on their bad day.   This post considers whether buying big-loser stocks on their bad day will lead to decent profits.

I should point out a significant limitation at the start.   This post pertains to one bad day 11/03/14.   Its potential relevance is therefore limited to the current environment.

Question:  Did the NYSE stocks that experienced the largest decline on November 03, 2014 subsequently rebound?   How much money did the people who bought the biggest-loser stocks at the end of the day on November 3, 2014 make or lose?

Data:   The data on the biggest loser and biggest winner stocks on a particular day for companies trading on the New York stock exchange are tabulated by the Wall Street Journal. 




The most recent 12/10 quotes (near the close of business) were downloaded from Google Finance. 


Stock Price Performance For Biggest Losers of November 3, 2014
Stock Symbol
Stock Price After Large Decline on 11/03/2014
% Decline on 11/3
Stock Price Near Close on December 10 2014
% Change From close on 11/3 to 12/10
RCS Capital (RCAP)
$13.69
-16.58
11.45
-16.4%
Furmanite (FRM)
6.51
-12.97
7.14
9.7%
Ampco-Pittsburgh (AP)
19.35
-11.2
18.61
-3.8%
LRR Energy (LRE)
14.76
-9.5
7.58
-48.6%
Haemonetics (HAE)
34.74
-7.9
37.5
7.9%
CHC Group (HELI)
6.2
-7.74
3.79
-38.9%
Granite Construction (GVA)
34.09
-7.64
36.1
5.9%
Seventy Seven Energy (SSE)
12.08
-7.57
4.74
-60.8%
Laboratory of America Holdings (LH)
101.23
-7.37
103.9
2.6%
Millennial Media (MM)
1.9
-7.32
1.61
-15.3%
Goodrich Petroleum (GDP)
7.66
-7.04
3.47
-54.7%
Key Energy Services (KEG)
2.84
-6.58
1.27
-55.3%
Sturm Ruger (RGR)
39.1
-6.19
36.21
-7.4%
PetroQuest Energy (PQ)
4.41
-6.17
3.67
-16.8%
Opower (OPWR)
17.05
-6.11
14.46
-15.2%
RingCentral Cl A (RNG)
12.34
-6.09
13.37
8.3%
Gafisa ADS (GFA)
2.01
-6.07
1.7
-15.4%
ION Geophysical (IO)
2.63
-6.07
2.53
-3.8%
Sanchez Energy (SN)
16.04
-6.03
6.99
-56.4%
TimkenSteel (TMST)
38.17
-5.94
32.64
-14.5%




Analysis:

Below are some statistics on the subsequent returns of the 20 largest NYSE from 11/03/14.



Statistics on Biggest losers of 11/03/14
Mean
-19.4%
Median
-15.2%
Std
24.1%
Q25
-46.2%
Q75
1.0%
Min
-60.8%
Max
9.7%
  

Investing in these stocks even after their big decline would not have provided a pleasant result.



Gain/Loss for Investor who buys $1,000 of each stock at close on 11/03/14
Stock Symbol
A $1,000 investment
per company
 on
11/03/14
Value of 1000 share near close on !2/10/14
Difference
RCS Capital (RCAP)
$1,000
$836
$164
Furmanite (FRM)
$1,000
$1,097
-$97
Ampco-Pittsburgh (AP)
$1,000
$962
$38
LRR Energy (LRE)
$1,000
$514
$486
Haemonetics (HAE)
$1,000
$1,079
-$79
CHC Group (HELI)
$1,000
$611
$389
Granite Construction (GVA)
$1,000
$1,059
-$59
Seventy Seven Energy (SSE)
$1,000
$392
$608
Laboratory of America Holdings (LH)
$1,000
$1,026
-$26
Millennial Media (MM)
$1,000
$847
$153
Goodrich Petroleum (GDP)
$1,000
$453
$547
Key Energy Services (KEG)
$1,000
$447
$553
Sturm Ruger (RGR)
$1,000
$926
$74
PetroQuest Energy (PQ)
$1,000
$832
$168
Opower (OPWR)
$1,000
$848
$152
RingCentral Cl A (RNG)
$1,000
$1,083
-$83
Gafisa ADS (GFA)
$1,000
$846
$154
ION Geophysical (IO)
$1,000
$962
$38
Sanchez Energy (SN)
$1,000
$436
$564
TimkenSteel (TMST)
$1,000
$855
$145
Total
$20,000
$16,113
$3,887


The investor that purchased $1,000 of each 11/03 loser at the close would have lost an additional $3,887 by the close on 12/10.

Note this is a -19.4 % return, which is also the simple mean return.


The people who got out of the biggest losers early in the day are better off than the ones who stayed.

Conclusions:   A lot of Wall Street Pros believe that you should never attempt to catch a falling knife.  These pros say when markets or stocks are truly crashing stay on the sidelines.


The results presented here pertain to 11/03 only.   Right now the 11/03 environment of collapsing energy still exists.   It will someday make sense to bottom fish distressed firms but an investor that plays this game needs a certain amount of information and patience, much more than the impulse buyer at the COB of 11/03/14.


Would buying big-gainers work better or are investors in big-gainers too late?

http://dailymathproblem.blogspot.com/2014/12/subsequent-performance-of-biggest.html

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