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R.C., First to answer your easy question: What is a dead cat bounce? Many times after a stock takes a big tumble, it will rebound slightly and turn lower again. The rebound is known as a "dead cat bounce".
Your second question about OLM. Very strange is all I can say. The company's revenue and earnings are both growing rapidly yet the stock is trading near it's book value of $10.90. The PE is only 8.3 with a growth rate over 25%. Additionally, there was net institutional buying of 8.8M shares last quarter. So what's happening with this company. The only thing I can figure is that investors were disappointed on Oct 16 when a buyer for the company stepped away. The stock retraced to where it was on Aug 26 when the offer first surfaced.
Another factor to consider is that this company is highly dependent on a robust economy because they are assuming the risk of automobile loans. If the economy sours and delinquency rates goes up, the stock will suffer.
This company is in a rather complex business and I need some more time to understand it. Do they package and sell all the loans they buy (like FNM does with mortgages)? Or do they retain and service the loans (like a mortgage company)? Or do they do a little of both? What impact will falling interest rates have on them? A recession? What determines the interest rate spread they get? I guess they borrow money at a lower rate than the automobile purchaser is paying and the difference is their revenue. So the stronger they are financialy, the lower their cost of funds, and the higher their profits. It seems like a takeover by a company with a better debt rating would be good for the company because it would increase their profits.
Another positive is that the company announced a rights offering on November 4. This plan is nothing more than a "poison pill" that many companies adopt when they feel their stock is undervalued. This discourages a hostile takeover of the company at an unfair price.
Another interesting thing to do is overlay the OLM chart with F, C, and GM. The charts track pretty well until the Aug - Nov timeframe. The only significant news during this period was an earnings release (which was favorable) and the failed buyout of the company. My guess is that once the news wears off about the failed buyout, the stock will retrace to the 16 - 17 area on fundamentals alone. I'll be watching this one as well, and doing some more research. Thanks for bringing it to my attention.
Now back to BBY. Clearly the news out last week contributed to the decline, but the 4 point decline was just a follow through of what started about two weeks ago when the stock broke support at $20. You asked me: "How much is psychology and how much is fundamentals". This is a tough question. A technician will tell you it's all psychology and a fundamentalist will tell you it's all fundamentals. I study the fundamentals to decide which stocks I want to buy and I use the technicals to see if the market agrees with my analysis and to try to time the market. Sometimes it works and sometimes it doesn't. But my track record over the past several years is pretty good, so I'm going to stick with it. At least I have a strategy. Some people playing the market have no strategy at all. This is a sure prescription for losing money, unless they are very lucky. But back to your question: I think there are days when psychology moves a stock and I think there are days when fundamentals move a stock. IMO, a stock price reflects investor's opinions about the present value of a company's expected future earnings. I believe that the collective decisions of investors shows up as support and resistance points on charts and that's why I believe in using them to make decisions. BBY held support at 12 -- for now. But, my guess is that it will eventually break this because I think we will see deteriorating fundamentals in the future. As soon as enough investors agree with this, the stock will fall below support at 12. But if I'm wrong, and I certainly could be, the support will hold, the stock will continue to recover, and the fundamentals will improve in a few months.
Dan |
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