I decided to sell all of my holdings in Digital River (Nasdaq:DRIV), a provider of e-Commerce tools and applications to many clients. The company is based in Minnesota, far away from the hoopla surrounding online advertising, but plucking away in the field of online commerce. e-Commerce is relatively less sexy than online advertising, particularly now.
Under-promise, Over-deliver
I like the company a lot: it’s delivers substance with very little hype or flash. To the world of investing, that means it underpromises and overdelivers, which means it’s a nice stock to own.
Trades Within a Range
The thing is that - as the stock chart below demonstrates - the stock has traded from the mid 20s to the mid 40s over the past two years. I’ve bought in many times in the high 20s and sold many times in the low 40s. More importantly, the company’s market valuation has fluctuated between just under $1 billion all the way up to $1.75 billion.
I had sold half of my holdings in late May when the stock flirted with $45. The stock then fell to the $38 range. I hate to regret things, but I was telling myself: “why didn’t you sell it all? and get back in when the stock continued its $25-45 range? Of course, you can’t do that with the stock market, you would lose your mind if you did.
How Useful and Relevant are Analyst Price Targets?
Anyway, as much as I think that analysts do not have a clue as to what a stock price should be, and what a reasonable target should be (the reasons for that could make up a 100-page book, mind you, so we won’t get into it now), I do look at the relationship between a stock price and the 12-month target price. Frankly, 12 months is a long time to look into the future, but it’s nonetheless a good guage of whether a price is “ahead of itself” or not.
At the risk of over-simplifying my strategy:
- if the ratio is close to 1, it is a good time to sell (provided a lot of other factors encourage sell signs).
- if the ratio is low, I like to buy the stock (provided a lot of other factors appeal to me).
I probably should not give away me entire trading strategy, so I will stop at that.
When the company announced results this week, it posted a 30% spike in profits after the market close, despite this, the stock fell a couple of dollars after hours. I simply did not understand. I read the press releases, did I miss something?
Did the CEO disappear? Did he quit to join Greenpeace? Did the largest clients leave for the competition? Was Google entering the marketplace?
Nothing. But as the chart demonstrates, the stock has been misread by many and it has led to some selling and buying opportunities.
(more text after chart)
Of course, the next day, the stock was up 10%, to $44. Part of that spike was not only the 30% spike in profits, but the CEO’s hinting that MSFT was likely to become a client soon.
Buy on Facts, Sell on Rumors (or is it the other way around)?
All right, I love the company, and believe that the stock is well-positioned to rise over the next few years, but surely it will probably still dip on some days, as such, I decided to unload my holdings.
Why?
Well, the potential of a MSFT deal was now reflected in the price. Sure, I know the old time-tested trading adage: buy on rumors, sell on the facts. But, we think that applies more to M&A deals, not business deals.
In the three short years I have been trading, I’ve seen that in this market, it’s better to sell when a rumor comes out, cause after that, unless the rumor becomes true, the stock gets a bit deflated, even in M&A deals that do not materialize (Cisco’s CEO telling press he’d like to buy Nortel in 2003 led to the stock’s peaking at $4.99, the $4.99 price reflected the expectation of the premium Cisco would have paid for Nortel. Now, due to many reason, NT trades in the low $2 range).
Back to DRIV, it’s not much of a rumor that MSFT is seeking to embrace the Web and as such will view a deal with online e-commerce provider MSFT as a good thing. Call it a rumor, to me, it’s an extension of the trend MSFT is going.
The facts in this case? DRIV is flirting with the high-end of its range (the 52-week high is $48, mind you, but you should not be greedy).
But it’s summer time, volume is low, there will be more buying opportunities.
[Disclaimer: at the time of this writing, I do not own shares in DRIV, but of the companies mentioned, I do own shares of MSFT, Nortel]
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