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Trading Beaten Down Stocks


Heavy selling offers up opportunities.

The market shows no mercy for bad news these days.

Crocs (CROX) is down 40%, Affymetrix (AFFX) is off 35% and Sigma Designs (SIGM) is lower by 22%. First the bad news: This kind of action is disturbing because these stocks were already beaten down.

Since I joined the 'Ville I've contended the elimination of the uptick rule was terrible. Recently other's have joined the chorus and pressure seems to be mounting that this issue needs to be revisited.

However, all this weakness isn't due to the uptick rule. A lot of other things have to occur for this kind of selling to set in. Bottom line: The speed at which stocks have been taken down this year is truly stunning. 2002 sell-offs were nothing compared to some of these raids.

I'm not complaining about this and am writing to point out that with this action comes two messages. First you had better be ready for this kind of action both emotionally and from a position management perspective.

Second, these huge moves can present amazing trading and investment opportunities.

So onto the names. I can't help much with CROX, since I don't follow the stock closely.The company doesn't have a huge cash hoard or massive book value. As far as franchise value, I'll let some else make that call.

I've long favored Braodcom (BRCM) over SIGM and the pressure is starting to mount on SIGM as it's reported the company lost a set-top box design to BRCM, which is causing today's weakness. When you start losing you core sales, valuation gets quite touchy.

On the plus side SIGM is now trading at two times cash and even cheaper on price to book levels. 1.5 times cash might be a gift on these shares, but also might be a reality and would put the stock under $13.

AFFX is possibly the most surprising today. The stock hasn't been this low since the 1990's and the firm has been a generally steady if unspectacular grower over the last few years. AFFX announced an earnings miss, but it wasn't a whopper of one. It's also not the first time the company has lowered guidance by $10-15 million -- which translates to about 3% of revenue.

Additionally, the company confirmed it received $90 million from a previously disclosed patent settlement. While expected, it's always nice to get the cash in the door and this strengthens an already pretty solid financial structure for the firm. AFFX has nearly $9 per share in book value and may have jumped over that with the $90 million.

The stock's down more than 35% today, on a 3% revenue miss, selling close to 1 times book value, analyst downgrades galore and I can almost guarantee I'm the only one talking about book value on this name - or SIGM for that matter.

One one hand I think it's gotten far, far too easy to create a selling crescendo in individual stocks and the uptick rule needs to be reinstated, on the other hand let's leave the darn thing in place for the rest of this quarter. I plan on picking away at a few names as I'm picking away at some AFFX today
Position in AFFX

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