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Cluster Buying: When Bad News is Good NewsBy Graham SummersWednesday, December 6, 2006 As we approach quarterly earnings season, I’m reminded of how little I care for quarterly earnings.
Why there are estimates in the first place is baffling. Do you estimate how much income you’ll make in the next three months? Down to the last dollar?
Well, imagine trying to estimate the earnings for a multi-billion dollar corporation. Yeah, it seems kind of impossible to me too. And doesn’t it make more sense for a company’s management to focus on its actual business than on massaging an income statement?
And remember who’s doing the estimating.
It’s common knowledge that most analysts fail to beat the market… so why they’re the ones estimating a company’s quarterly earnings is beyond me. I’m not poo-pooing all analysts. There are plenty of great ones out there… but I’ve never read about Warren Buffett wringing his hands and crying, “Curse you, Coke! I expected $135 million, not $134 million this quarter!”
However, sometimes bad news is good news. Especially when a company’s woes are only temporary in nature. At that point, missed estimates, and the subsequent sell offs, present you with a great chance to buy shares on the cheap.
How do you know if the woes are temporary? Well, you could spend days and days analyzing the company’s financial situation. Or, you could see what its insiders are doing.
If a company misses its quarterly earnings estimates, tanks, and you see the insiders buying, you better believe that stock is ready to rebound. Especially when you see cluster buying: several insiders buying within a short period of time.
Take the graphics chip maker, Nvidia (NVDA), for example.
In July 2004, Nvidia missed Wall Street estimates. Following the subsequent sell off, Nvidia insiders loaded up on $20 million worth of its stock.
Noting this, as well as the fact that the company was about to unveil its next generation of graphics processing units, I recommended Nvidia to subscribers of Inside Strategist. We made 67% in six months.
I noticed similar cluster buying following a quarterly earnings miss in a materials stock a couple of weeks ago. I’m sure its future performance will be similar to Nvidia’s.
As quarterly and year-end results come rolling in the coming months, forget about the estimates and the nonsensical Wall Street ratings of “neutral,” “underperform,” and “I don’t like this very much.”
Rather, look at the guys who run the companies. You can tell what they think based on whether they’re joining in the sell off, or taking advantage of the price dip to load up on shares. It’s an easy way to go against the crowd and pocket a quick 10-15% gain in a month or two.
Good trading,
Graham
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