Review of Letting the Despair Ride: RSAS, CMX, VTSS
By Dr. Duru written for One-Twenty
June 29, 2006
A little over a month ago, I used VTSS, RSAS, and CMX as examples of stocks that did not make my definition of buyable despair. Well, after some big news hit two of these stocks, I decided I should do a quick review of the results and my thinking.
The first news I noticed was that VTSS got delisted after the close of trading on Tuesday. The company simply could not recover and get its act together fast enough to produce the necessary financials to remain listed. I do not follow companies on the pink sheets, but I suspect that as long as a capable management team gets in there, the company will be back in some form or another at some point. Those financials were the final key to holding any hope that the company could rise from the ashes in the intermediate-term. So, with VTSS, my warnings and wariness were quite justified. Very ironic that the company I liked the most was the one that fared the worst. In fact, it was the one stock where caution was indeed warranted!
After I saw the news on VTSS, I decided to check in on the stock chart on my old buddy RSAS. Wow, was I surprised! Instead of languishing like the rest of the market for the past few month, RSAS was on a tear. It was bouncing just like a "despair" play should. I did not understand (a function of having ignored the stock since I mentioned it in May!), so I checked some news to see whether anything could explain the immediate recovery. My scan was quick, so I mainly saw the typical chatter of upgrades and positive channel checks. I did miss some Wedbush commentary claiming that RSAS was probably already over the hump. Even if I had, I would have ignored it because I like to see situations where the analysts are immediately negative and reactive. Too bad for me. The stock was up over 30% since then. And then the biggest news of all dropped this morning. Rumors of RSAS being sold! On a big rally day that rumor alone was good for a 18% pop. RSAS confirmed "strategic talks" and Morgan Keegan came out to say that current levels of $24 seem like a fair price. After the markets close, EMC blurts out that they will do Morgan four better and offer RSAS $28/share in cold hard cash. Good for another 19% pop in after-hours. Needless to say, I am regretting missing this monster move. Almost a double from May's levels of despair. The best despair play of 2006. But that is all hindsight. I am really shaking my head over not keeping up with the story more frequently and then not grasping the implications of the improving technicals and positive news flow. Needless to say, this was a HUGE miss as far as these despair plays go!
Finally, we have CMX. Of the three, I know the least about this company. I am still not all that interested in it, but I thought it only fair to round out the discussion with this last follow-up. Not a lot of news has happened for CMX in the last month. I can only assume that the market has interpreted the absence of bad news as good news. The stock has very grudgingly recovered from the lows of despair in May. This is one where a small reminder of the headwinds in front of this company could take the stock down all over again. Regardless, the discount has already disappeared. In fact, the stock never provided much of a despair discount as the stock "only" closed the post-earnings gap. It did not even make lows for the year. It was a tough call then with a lot of risk and a little reward. Even with hindsight, I am comortable with that call.
Are there any lessons to learn from this? Perhaps. The biggest reminder is that buying into a steady flow of bad news is a bad way to try to cash in on despair. The bad news just never stopped on VTSS, and it never let up enough to make the situation look even remotely attractive. Next, follow-up on the plays you decide not to pursue. At worst, you will fine-tune your radar for judging risk/reward. Perhaps you will discover an error in your initial assessment and hop on the recovery bandwagon before it gets to the next station. Finally, do not make a contrarian play in a situation where you know little. If I had bought into CMX, there would have been several times where my lack of real knowledge would have taken me out of the stock before it was finished rewarding the risks I took.
Until the next moment of despair, be careful out there!
Be careful out there...!