Tuesday, February 3, 2015

The Bombardier Torpedo

Last July 31, 2013 I posted a comment on the exogenous event torpedo-like collapse of the potash related stocks and cautioned there is no fundamental or technical defence against your stock being hit by a torpedo. The use of a system stop loss is also a bad idea because your stop sell order may become a marker order during a short panic which is not a good time to bail out of a position. The good news is that you have choices on how to react to the torpedo. In other words, do you react and sell now, or do you not react and hold on to your position? The choice you make depends on the nature of the exogenous event.

If the exogenous event is deemed to be just the beginning of a series of unresolved issues such as in the Sino-Forest example, you should sell and don’t look back. If the exogenous event is deemed to be a one-event issue that can be resolved by management, such as the Shoppers Drug Mart Corp collapse of April 2010 you should just hold on to your original position. In most cases the stock in question will pause, build a base and resume the original advance. The technical rule is that a stock will only react (or torpedo) once in response to a one-issue exogenous event. So in the case of the potash stocks – if you are long, just hold on to your original position.

The Potash Corp (POT) torpedo of July 30, 2013 took the stock down form $39 to $29 in one day – today POT closed at $46.50. Now we have the recent Bombardier (BBD.b) torpedo of January 15, 2015 that cut the price by one third in just one day. This is likely a sudden collapse in price in reaction to a negative event relating to the company’s business model. BBDb will likely go-up or blow-up and I don’t think Canada’s biggest aerospace employer will blow-up any time soon.


No comments: