Wednesday, January 12, 2011

Acme United: Up For All The Wrong Reasons

Acme United (ACU) is a stock that has been discussed on this site as a potential value investment. In the last two days, on no news, the stock is up more than 10% on daily volume that is 10 times higher than normal. The reason for this appears to be a clerical error!

While market participants should strive to understand a company before investing in it, many of them don't. For example, there are a number of "Cramericans" out there who buy stocks blindly. This became quite clear this week as it appears followers of Jim Cramer's show Mad Money bought shares of ACU because of an errant article.

CNBC correctly reported that Cramer recommended a company by the name of Accuride on his show last Friday night. But CNBC mislabeled the company's symbol, referring to it as ACU instead of ACW. They corrected the error a few days later, but not before some blind followers bid up ACU's shares!

So now what? Should value investors sell, on the expectation that Cramericans will cause the stock to drop in the future once they realize their mistake? I would argue that value investors should only sell if they feel the stock price has reached its intrinsic value. They should not get bogged down in the short-term trading game; there are no assurances on what will happen in the short-term, which is why value investors are long-term oriented to begin with. For example, it is entirely possible that the stock now becomes a positive momentum play for another group of blind speculators.

It is scary that there are investors out there who don't even study a company enough to verify its name. It's even scarier that this group of investors is large enough to move a stock's price significantly. How's that for an "efficient market"?

Hat tip to Trevor Scott for noticing the error.

Disclosure: Author has a long position in shares of ACU

4 comments:

Anonymous said...

Great article Saj!

Mario R.

Zachary said...

Cramer probably isn't the place for investment advice since by the nature of the shown he recommends half of america. Listeners should just go out and buy an index fund if that's what they want.

Anonymous said...

To be fair, efficient market advocates suggest efficiency and rationality aren't the same thing.

Ankit Gupta said...

I'd say sell if it doesn't have the margin of safety any more. The reason for a price increase shouldn't matter in this case - sometimes it's better to be lucky than right. The luck only comes, because you were prepared at the right time anyway.

The reason only matters to the extent that if you think it will create an opportunity to buy in again once it drops below your intrinsic value.

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