Solid Arguments for Taking Gains off the Table

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A strange reaction occurs in the market: When a stock trends higher we tend to forget about all of its problems (ie Nokia). To the contrary, when a stock trades lower we forget all the positives (ie Apple). A good investor can remain neutral and keep a balanced view regardless of whether a stock is $5 or $10. With that being said, I am looking at three stocks that had seen short-term rallies but were brought back down to earth due to a reality shock from analysts that investors should adhere.

SandRidge Energy Might Be Sold, but if Not, Then Problems Still Exist

Over the last month, shares of SandRige Energy (NYSE: SD) have rallied higher by nearly 25%. The large gains came as a result of the hedge fund TPG-Axon requesting that shareholders vote to replace the directors, clearing a path for the company to be sold. The hedge fund, among other large investors, has been very critical of the company and investors believe that action follow.

Two weeks ago Global Hunter reminded investors that although a potential sale would be nice, we must not forget that this is a company with $4.3 billion in debt, a major obstacle for an acquisition. However, it was Canaccord’s Sell rating on Monday that forced shares lower by 4%. The firm stated that its rally has only occurred as a result of “unfounded expectations” of a takeover.

The firm also noted that the current clearing price for acreage in the heart of the Mississippian play is ~$1,500/acre, which includes associated production. Therefore, a sale does not improve the company’s financial standing and will most likely hurt its likelihood in the process. Investors must remember this fact, especially those who are buying on the notion of a takeover, as this might be a fundamental reason that it does not occur.

 

HP Rallies as Investors Speculate a Breakup; but a Breakup Likely Will Not Occur!

Since Nov. 21, shares of Hewlett-Packard (NYSE: HPQ) have rallied higher by more than 25%. The reason for its rally was in part due to a bounce off the bottom from the Autonomy scandal. But also, it was a combination of factors including a belief that Windows 8 sales were strong, strength in its financial segment, several insider and big name buys, and most notably the rumors of a broken up HP. However, investors must remember that although these factors look encouraging, there are still many problems that exist.

On Monday and Tuesday, two different analysts, from Deutsche and Topeka, issued warnings to investors. Deutsche’s Chris Whitmore was very blunt when he said that HP isn’t worth more broken up than in one piece. He said the company is better served remaining whole due to significant cross business unit synergies, therefore making a breakup nearly impossible.

Topeka’s Brian White gave the stock a Sell rating. He expressed concerns over the weak IT spending environment, Cisco and EMC’s ambitions to become broader IT providers, and of course European exposure. The bottom line is that regardless of whether you buy into the breakup rumors, there are still many operational issues, many of which will make a breakup quite difficult to achieve.

 A BlackBerry Emergence Might Sound Good but Will it Occur?

Since announcing a large Q2 beat, shares of Research In Motion (NASDAQ: BBRY) have rallied more than 90%. The rally has been sustained, following Q2 results, in part due to several analyst upgrades and optimism for the launch of its BlackBerry 10 operating system. Apparently, investors believe the BlackBerry 10 will be different and will compete with Android and the iOS; but will it?

In the last two days shares of RIMM have traded lower by more than 3%, not a good sign considering the strength of the overall market. The loss is the reaction of two downgrades from UBS and National Bank. UBS’ analyst compared the rally to that of Palm, a stock that rallied from $3 to over $18 but then fell back to under $4. Therefore, he indicated that the optimism for the BlackBerry 10 might be far from the intended outcome.

In a social world that is driven by technology, the presence of apps has become the difference between success and failure. Both the iOS and Android operating systems have more than 700,000 apps. Meanwhile, the goal of RIMM is to have more than 70,000 BlackBerry 10 apps by launch. Therefore, it might not matter if the operating system has improved; it might still be inferior to that of its competitors, and therefore fail despite the stock’s large gains.

Conclusion

I think Warren Buffett said it best: “Be fearful when others are greedy. Be greedy when others are fearful.” In relation to the discussion, it means that just because a stock trades higher, don’t change your long-term outlook. If you benefited from the gains of any of these three stocks then congratulations, but even so, it might still be wise to assess the other side of the trade and possibly take profits off the table.  


BrianNichols has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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