written by reader $STMZp

By koncurn, May 9, 2019

What are your thought is buying after a drop of more than 50%?

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Travis Johnson, Stock Gumshoe
May 10, 2019 9:20 am

I assume you mean Stamps.com (STMP)… I’m not interested, personally, seems like a poorly managed company in a declining industry that has lost its most value asset (exclusivity… which itself probably wasn’t as valuable as folks thought for a while). There might be a bounce back from that collapse, I don’t know, but it’s also quite possible that this is just the beginning of the decline.

Sometimes stocks fall by 80-90% as investor interest in their industry declines — it doesn’t mean they’re worthless, but they’re definitely worth less and it can take quite a while for the market to really absorb the changes to a business. There is a tendency to believe that a 50% fall means a stock must bounce back, particularly because stocks that fall that fast often have pretty compelling-looking trailing financials (it’s the future that makes them fall, not the past), but trying to catch a falling knife is dangerous if you don’t have a lot of confidence in the underlying business. If you want to buy the stock, first learn enough about it to be confident in the management and their future prospects and have the certainty that you’d want to still hold it if it falls 30% from here… it’s not worth buying collapsing stocks just because of some hope that they might bounce back, the timing is too hard and the odds too unpredictable.

Remember, the math is cruel: even a stock that has fallen by 50% can still fall by 100%.

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