Hot Stock Tip! Two ways to Approach the Beast

I”m going to run through a typical exercise here at Green Horn Investor.  

We got a “!Hot Stock Tip!” from someone.  It”s their pet company, or a friend recommended it to them, or a small news quote about imminent business this company was about to get where it would solve world hunger or single-handedly reverse the general market slide or some such interesting piece of drivel.  “This stock is hot and you better get on board!”  We ask “what do you have?” “Just a ticker symbol,” and in breathless anxiety, “I”m thinking about dropping my whole pile into this thing. What do you think?”

So here goes.

Stock Symbol “DCTH”

We”re not immediately familiar with this company.  But that”s not a problem.  We want a calm evaluation of the facts – if you already love a company then you will be biased and have already donned your “rose colored glasses” or “beer goggles”.  Please note, we do have a few sets of those ocular pieces of standard-issue market gazing equipment and will use them ourselves at inappropriate moments, by the way.

What”s the Technical Analysis? So we look it up. Here”s what we find…

The first curve is the “A/D line” – basically the balance from those acquiring to those dumping the stock.  We usually like to invest in companies that are trending up here – since more buyers mean a climbing stock price from more interest.  Seems like it”s getting dumped.

The next line is the “MACD line” – which should also be going up for the stocks we like.

The bottom is the standard price and moving averages plus some other fun things that are nice to watch but don”t give a lot of real information.  A typical head and shoulders formation happened at the July time frame and the regular measuring formulas show the current price blew through the possible recovery points.  Someone was really hanging in there for a while during all of August.  But it looks like they gave up and are unloading along with everyone else.

So that”s the technical analysis.  As you can see, mostly tea-leaves, but we like it because it”s a good balance with the Fundamental Analysis approach.

Short aside, which we will likely expand in a future post, is that Technical reads the near term trading prospects – certain patterns are repeated based on buyer and seller dynamics of the stock.  This is a short term tactical view – but important.  If you make a bad tactical move, a stock could trade against you and you”re down 50% before any of the long term Fundamental factors kick in to save you.  And what if you waited a bit and bought at the new 50% “on-sale” price? Only gravy.  Fundamental Analysis is concerned with the history of the company, usually last year”s financial and quarterly results.  These are history.  You can look at all the years of a company and get an idea of their management strength in consistent and improving business success (or not) and see if you should invest. You can ask “is this a group of people I think will do well with my money over the long future?”  So you”ll do some more math and compare Price to Equity ratios, earnings, and so on.

So what does a quick look at the Fundamentals reveal?  We see this company is in healthcare and some stuff about cancer drugs (profile popped up before I could look away, so much for looking at just the facts!).

And here”s our answer for the Technical trends… Among all the things going on, a simple quick look shows the company has $15M in cash with a $5.25M annual operating cash flow burn rate and $6.5M loss in EBITDA over the last twelve months.  That”s history. A bad history.

To show it bluntly… if this company were a regular Joe it”s got $15 in savings while paying an annual mortgage of $5 and will be out of money in three years unless it finds a new higher paying job, a rich uncle, or trips over a nickel on the street.

We could go into detailed analysis of the headline news (maybe use Google to see what”s up with this stock) and probably find that there were some significant announcement of getting FDA approval of a new drug or something that fell through, but what”s the point?  Fundamentals show it”s in trouble and the Technicals show that the last vestiges of hope have failed and there are major holders of the stock dumping it.  And it might be a while before anyone gets interested again.

Is that the true story?  Could be or might not.  Does it seem like a diamond that could be cut and waited on? Maybe.  But it”s pointless for us.  We don”t think it”s a good fit for us (others love this stock – hence the “hot stock tip”).  But not us right now.  There are over 3,000 other securities to look at – a few that will pass some of our initial quick screens.

But that”s just us.  Maybe you”re still interested in the Beast and can”t get it out of your head.  It won”t hurt to sit a bit.  Sit a few days and see how the company looks.  Maybe watch it for a month.  If the view improves then buy.  If it continues to look worse aren”t you glad you had a good think about it?

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