Stocks are usually kind and considerate enough to tip off investors before they jump off a cliff.
Generally, they will display some sort of irrational behaviour to signal an impending selloff. The red flag may be extraordinary volume or a sudden break through a key technical support level that would signal a change to a downward trend for the stock.
But there is almost always something to alert investors to trouble – so that smart-ass columnists can say: ‘I told ya so,’ scold the lunkheaded investors for failing to react and award the analysts with fresh pom-poms for Christmas.
But then there was an ill-mannered stock named Merck that forgot to be kind and considerate.
This once-upstanding citizen of the upscale Dow 30 neighbourhood turned into a sneaky, dirty, rotten scoundrel (NYSE:MRK).
Merck & Co. Inc. didn’t even have the decency to offer shareholders a cigarette or a blindfold before taking them for its recent big plunge into the abyss.
Merck, ’Ol Blue Chip of the drug giants, plumb forgot about proper street etiquette.
It just plain spit out a bombshell of a press release and instantaneously assaulted shareholders with a below-the-belt, 30-per-cent loss. Worst of all, we can’t even pin the blame on the analysts this time.
The selloff on news of blockbuster arthritis and pain drug Vioxx being yanked off the market due to a potential risk of heart problems from prolonged use lopped a heart-stopping $27 billion US off the drug giant’s market cap in one day.
What was even more perplexing for shareholders was that on the day prior to the crash, Merck was actually up 15 cents to $45.07 US on normal volume of 4.9 million shares.
The stock had traded sideways for a month in a range between $44 and $46.
Normally, these kinds of selloffs turn into sweet buying opportunities.
But this is not a normal situation. With the lawyers in the United States of Litigation already lining up to throw their law books at Merck, this story ain’t over till it’s over.
In the process of taking its stockholders out to the woodshed, Merck reinforced one of the great lessons of the market: To build diversified portfolios.
The damage was minimal to investors who didn’t have all their eggs in one basket, but held portfolios of several stocks in varied sectors.
* A DIME-THAID FOR YOUR THOUGHTS: If you happened to be a Merck shareholder, you could have recouped your losses within one day if you’d sold on the 30-per-cent drop and reinvested in the anti-Merck – Dimethaid Research (TSX:DMX).
Oh, you didn’t know stock in Dimethaid, a biotech company that has an anti-arthritic lotion, would spike 67 per cent the day after Merck’s crash?
It’s also likely that you didn’t know Dimethaid was going to release news, a day after the Merck crash, of a study showing its lotion to be safer than pills with the same active ingredients.
* TAKING A STAND: Vancouver-based Real Assets Investment Management, a fund manager focused on ethical investing, recently announced it had sold off its remaining shares in Gildan Activewear (TSX:GIL.A) over concerns with the T-shirt maker’s treatment of workers.
So did investors follow the lead taken by Real Assets CEO Deb Abbey?
Not exactly. Gildan stock actually traded up 60 cents on the day Real Assets announced the sale, which says something about the social conscience of investors.
Real Assets took its stand based on the Montreal-based company’s recent decision to close a plant in Honduras, resulting in 1,800 layoffs.
“By shutting down a ‘problem’ factory, Gildan is telling the workers in that region that they must keep quiet about labour and human rights violations or they’ll lose their jobs,” Abbey said in a press release. “We don’t believe that this is in the interest of shareholders or long-term company sustainability.”
* FOUR YEARS AGO: In the inaugural issue of the Edge, with the tech bubble about to burst, Calgary tech analyst Brian Pow of Calgary-based Acumen Capital gave us his Three Stars – VisuaLABS (TSXV:VLI), RightsMarket (TSXV:RTS) and MediSolution (TSX:MSH).
We should’ve dubbed them Falling Stars.
VisuaLABS, which then traded at $13.30 and Pow recommended as a speculative buy with a 12-month target of $18, turned into the biggest scam involving a Calgary company since Bre-X and was delisted long ago.
RightsMarket, which then traded at 90 cents and Pow recommended as a speculative buy with a 12-month target of $5, also ceased trading last year when it was transformed into an oil and gas company.
MediSolution, which then traded at $2.41 and was recommended as a buy at Acumen with a 12-month target of $7.75, was last seen at 36 cents.
And now the good news . . .
There isn’t any.
* SAGE WORDS: “The problem with companies is that they have managements, and it’s people that make good and bad decisions.”
– Paul van Eeden, pro investor and president of Cranberry Capital, on ROB-TV’s Market Call.
HOT STOCK: Tsodilo Resources TSXV:TSD $2.30
Up $1.25 (+119.0%) on 361,100 shares (for week ending Oct. 8).
The market seldom lies. Somebody must know something about Tsodilo and its diamond prospects in Botswana. The Toronto-based exploration company said there was no material change after the TSX Venture Exchange halted the stock and requested an explanation for a sudden spike in which sparkly-eyed speculators boosted the shares from $1.32 to $2.20.
COLD STOCK: Open Text
TSX:OTC $19.01
Down $4.04 (-18.0%) on 5.46 million shares (for week ending Oct. 8).
Open Text supplies software to businesses. Maybe they need to develop software that could help them track their market so that shareholders don’t get any more earnings surprises. The Waterloo, Ont., company was pummelled when it warned it would lose money in the first quarter and analyst Martin Cecchetto of UBS Securities Canada also provided a warning, citing credibility issues at the company in its communication with investors.
(Gyle Konotopetz can be reached at gyle@businessedge.ca)
