"'Turnarounds seldom turn… The same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price," – Warren Buffett 1979.
It can be awfully tempting to buy into a stock when it has fallen heavily in price in the hope of making quick profits. Indeed, buying into a company when the rest of the market is cautious can be a great move, but at the same time, there is often a reason the market is so pessimistic. It is our challenge as investors to determine when there is an opportunity, and when we are in fact attempting to catch a falling knife.
These situations become increasingly prevalent following profit season as the market attempts to determine which companies are good value and which they should part ways with.
In my opinion, Myer Holdings Ltd (ASX: MYR) is one such company. Its shares have plunged more than 18% this month after the department store giant announced what was considered to be a very disappointing set of full-year results. Although investors may be attracted to its generous fully-franked dividend yield, Myer seems like a stock to avoid right now as it continues to battle against the rapid rise of online retailing.
Many investors would also see iron ore miners like BC Iron Limited (ASX: BCI) or even Fortescue Metals Group Limited (ASX: FMG) as being great buys right now. Although both could jump considerably in the event that iron ore makes a strong recovery, I strongly believe there is more pain in store for the sector. In other words, I think these daggers are falling fast and could hurt a lot of investors on their way down.
Considering that rare earths miner Lynas Corporation Limited (ASX: LYC) traded as high as 42 cents earlier this year, some within the market will see its current 11.5 cent price tag as too good to be true. However, there are good reasons why the stock has fallen so significantly. Aside from tumbling rare earth oxide prices, the company has also ceased negotiations with its financier. This could be a sign it is nearing the end of its life.
