Punished Stocks of August
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The month of August has been generous for most stocks. The S&P finally broke its 1,400 resistance and confidence is slowly creeping back into stocks prior to elections. From the ETFs mentioned in the chart below, XLK - Technology SPDR has clearly taken the lead rising nearly 7% since the end of July. This is mostly due to the upbeat performance and heavily weighted allocation of Apple (NASDAQ: AAPL) and International Business Machines (NYSE: IBM) in XLK. AAPL allocation makes up almost one-fifth of the fund at 19.71%, followed by IBM at 7.8% and Microsoft with 7.6% of the total allocation. These stocks were the engines of NASDAQ and the reason it was able to sustain a key support level above 3,000.
But not everyone was cheering in August, especially the shareholders of Knights Capital Group (NYSE: KCG), a $300 million financial services company that was valued over a billion just a few weeks ago. The computer glitch that cost KCG a whopping $440 million has plunged the stock over 75%. Did the company deserve the sell off? I'll let you be the judge. How can a program that is meant to be tested quietly during market hours with a limited amount of shares cause a glitch that entered millions of faulty trades in Exelon, Nokia, and Berkshire Hathaway. After all the commotion, the president of the company, Tom Joyce, went on CNBC and gave five minutes of rhetoric on how technology seldom breaks. This was not what the shareholders were expecting from a CEO, but they were more attentive to the strategic initiatives with Goldman Sachs and JPMorgan to raise $400 million of convertible bonds. After all, the half a billion loss the company took in a matter of weeks was four times more than its last year's bottom line.
Wall Street's punishment of the market maker didn't end there, since now KCG has to deal with the lawsuits and investigations that have ensued because of the glitch. The law office of Brodsky & Smith is currently investigating potential claims against the company for possible breaches of fiduciary duty and lack of adequate controls to monitor its automated trading softwares properly. Avid traders, experienced bottom pickers know when to spot an undervalued opportunity and when to stay on the sidelines. Seldom these value gem opportunities are in fact value traps, as in the case of Knight Capital.
Another unexpected punishment came from Priceline's (NASDAQ: PCLN) disappointing fiscal year guidance due to the ongoing European turmoil. Despite beating the Street's consensus EPS estimates of $7.36 by $0.49, the online travel agency noted that year over year growth rates will begin to decelerate on a sequential basis. Over the last several years PCLN has experienced strong growth in a number of hotel room night reservations. This growth could be pegged to the broader shift of travel purchases from offline to online bookings, as well as the growth of travel in emerging markets, including Asia-Pacific and South America. But now the management has some competitive concerns going forward.
Management's outlook on the company sounded shaky on the MD&A part of the earnings transcripts. To paraphrase, Priceline executives are concerned that established internet search engines such as Google (NASDAQ: GOOG), which have substantial resources and expertise in developing online commerce and controlling traffic, can in fact create inroads into the online travel business. Google recently launched the Hotel Finder, a utility that allows its users to compare hotel accomodations based solely on parameters set by the user. It also launched a new flight search tool that allows users to find fares, availability, and schedules directly on Google completely bypassing online travel agents' participation. Priceline is keeping a close watch on its competition and added:
"If Google, as the single largest search engine in the world, or Bing, or other leading search engines refer significant traffic to these or other travel services that they develop in the future, it could result in, among other things, more competition from supplier websites and higher customer acquisition costs for third party sites such as Priceline and could have a material adverse effect on our business and financial condition."
These realistic risks being addressed by the management early on was a positive sign noted in my book, as I like to see potential pitfalls mentioned in the beginning of conference calls rather than attempting to hide them by painting a rosier picture for the participating analysts.
Nonetheless, besides William Shatner's tour bus plunge, not all news is bad for Priceline. The company recently launched an Express Deals hotel service that enables its customers to instantly save up to 45% on their hotel rooms without bidding. In addition, it continues to enhance its popular mobile offerings across iOS, Android and other platforms. This allows last-minute travelers to book hotels and rental cars wherever they are. Despite its weak forward year guidance, it is hard to say no to a company that rewarded its shareholders by a 70% yearly EPS growth. As more positive news comes out of austerity measures in PIIGS, this stock should see more upside and trade above $600 due to its revenue sensitivity from those regions.
edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services recommend Berkshire Hathaway, Exelon, and Nokia. 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. If you have questions about this post or the Fool’s blog network, click here for information.