Knee-jerk investment reactions happen all the time. But that doesn’t make them the prudent method of examining the risk or long-term potential of a particular stock.
One stock in the Weiss Million-Dollar Ratings Portfolio (WRP) will help me illustrate this point.
The stock is Corning Inc. (GLW). It makes up a little better than 4.5 percent of the WRP and it shows that the concept of firm-specific risk has been present over the past couple of days. Basically, firm-specific risk is realized when the actual financial performance of a company — or expectations for near- and far-future performance — diverges from previously held views. Earnings reporting seasons are rife with examples of stock-price jumps and slumps that are driven more by knee-jerk than a more-considered analysis of new financial data.
That’s what seems to have hit GLW this week. It fell nearly 10 percent after releasing its earnings Tuesday. Clearly, the selloff gained momentum as people jumped into the selling frenzy without a comprehensive view of what the news on GLW and related stocks truly means for Corning’s financial future.
Some background: We added it to the portfolio in February (and have added to the holding since). A look at the year-to-date chart reveals that we caught on to this stock at a pretty decent time, momentum-wise:
And as members of my service know, there are compelling reasons from a product standpoint, as well as from a financial-management standpoint, to keep the faith that, long-term, this company can flourish with its focus on glass technologies we all stare through on a daily basis.
However, the company’s display-technology division has recently been caught with its guard down. We’ve heard in recent days that one of its main customers for its Gorilla Glass — Samsung Ltd. — will be delaying the introduction of a new smartphone, and that another major customer — Apple (AAPL) — may be going with another vendor — GT Advanced Tech. (GTAT) — for display glass in future generations of its popular iPhone series of smartphones.
I won’t delve into all the details about the opportunities and threats to GLW’s business here, but the critical points of analysis include a fresh look at the markets for smartphones and tablet computers (where the company actually cited some unexpected weakness in demand), and GLW’s competitive position in them. This helps set expectations for forecast financial results, and is crucial to getting at a solid idea regarding intrinsic value of the company, and its stock.
But this is not the only division GLW runs. It also does big business in the market for LCD TV screens and substrates. Getting a handle on unit demand and pricing in this end-market must be part of the fundamental analysis, too. By better understanding the fundamental impact items such as weakness in any one of the company’s various end-markets could have on the whole company paints the complete picture needed to value the stock.
In investing, you can always just take a knee-jerk approach, selling when the stock sells off abruptly — as was the case with GLW yesterday — but I think it’s always important to consider the difference between short-term news effects and real changes wrought by those news effects in the proper valuation of a stock.
The bottom line on this screed is that there are inherent risks in stock investing, one of which is this type of firm-specific risk that changes in expected fundamentals have a mathematical relationship to how investors on the whole value a particular stock. As we can see in a longer-term chart of this equity, that perception of value can change erratically due to which and how many market participants choose to act on new information:
Along the way back from the brink a few years ago, there have clearly been some fits and starts in this stock’s progression upward. There are some other items in these charts I want to focus on in future columns, like the stock’s return to near its five-year high, as well as its current price, which is above its 50-day and 200-day moving averages. There are so-called technical considerations that come into play especially for investors with shorter time horizons.
So what am I going to do about this particular stock in the context of advising the WRP? Well, I won’t divulge our explicit plans outside of the membership community before they happen. However, as you may have gathered, new information has definitely entered my calculations of intrinsic firm value for this particular stock. If you want to follow my actions in the WRP, you can obviously join. But this type of general knowledge about investing — i.e. understanding the different aspects of risk — is something I try to impart on anyone who ever asks me about investing. Knowing ourselves, then knowing what is possible with regard to forecast company fundamentals, are two of the key ingredients to becoming a great investor.