Money Mongoose

Never try to catch a falling knife?

A simple rule of investing is “don’t try to catch a falling knife”. I’ve broken this rule a lot recently with the following purchases:

  • SuperMicro
  • Newell Brands
  • Stamps.com
  • TLRD
  • WPP
  • PMD

Let’s see how each one of these worked out:

SuperMicro (SMCI)

This is arguably not really a falling knife. The stock was beaten down due to accounting irregularities which are taking a ridiculously long time to resolve. The company has not filed with the SEC for a while and as a result got kicked off NASDAQ. Then a bombshell dropped when Bloomberg published an article stating that their servers had hardware backdoors inserted by China causing the stock to fall a further 40%.

To me, both issues are overblown though understandably some investors are required to sell when the company is suspended from NASDAQ. This is a golden opportunity for small investors who are not bound by these rules.

I managed to buy in the low $12 range so am up 60%+ on these holdings. I wanted to acquire much more but ran out of money at the end of last year. This stock was the second stock referred to in my post Temperament, patience, poker and investing. I picked up more at the higher price in the $15 range and those shares are up around 30%

Status: unrealised gains of 60% and 30%

Newell Brands (NWL)

I’d been watching this a while and was finally tempted when it dropped in late October. I managed to pick up for just over $16. I was doubly lucky as to fund my ZYXI and SMCI purchases, this was one of the stocks I sold off just before it tanked for over a 22% gain.

Status: realised 22% gain

Stamps.com (STMP)

I’ve had this stock on my list and was put off by the USPS risk. Lo and behold, this materialised causing the stock to crashed by 50%. So I bought it. I was in two minds about this stock. On the one hand, management had shown the courage to bite the bullet and take the short term hit to adapt to the changing environment. On the other hand, they bought back stock at double the current price knowing this was a likely scenario: hardly friendly to shareholders.

Status: breakeven

Tailored Brands (TLRD)

Not really a typical stock I would buy, but it stock price is beaten down and some potential upside… if the stock doesn’t bomb out completely. Decent dividend, but question mark over the sustainability and potential for cuts.

Status: breakeven

Psychemedics Corporation (PMD)

This fell 25% on uncertainties in the Brazilian market.

Status: up 5% (but probably a dead cat bounce)

WPP plc (WPP)

Perhaps the most ridiculous one in the list. It was a stock that I didn’t even want to buy! The stock has a lot of negative sentiment and probably slightly undervalued. I’d placed a speculative limit order which I thought I had cancelled along with other orders which I had pruned to bring more discipline to my trades. Well obviously I missed it and only realised I bought it when I checked my portfolio some time later.

Status: unrealized 7% gain

Conclusion

There’s a saying in poker that goes something like: “It’s not enough to know how to play good poker, you actually have to play good poker.” And so it is the same for investing. We know not to buy high and sell low, and yet we do. We know not to try to catch a falling knife, yet we are tempted.

In my case, SMCI is not really a falling knife, it was a good entry point for a stock which I expect to make significant further gains. NWL was a lucky catch and discard of a falling knife. STMP and TLRD remain unknown gambles that could make or lose money. Although I didn’t intend to buy WPP, it was on my list as a potentially undervalued stock and so I will now hold the position and see if it improves.

After a batch of knife-catching, I will try to be more disciplined and re-read my 2019 game plan and try to stick to it!


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