Stocks move in many different patterns, which is what makes investing so difficult. Yet, many investors think in only one pattern — cyclically.
If a stock falls sharply, won't it eventually rotate like a clock to the upside? And so, isn't it best to buy shares when blood is running in the Street
Deep-value professional investors make money that way.
The problem for the individual investor is that few have the time or research power to identify value.
A troubled stock might go lower and never return to the highs it once knew. And if an investor buys more shares on the way down, the results can destroy a portfolio.
Just because a $3 stock once traded for $40 a share doesn't mean it will return to that level.
Multi-concept restaurant franchisee Quality Dining (QDIN) debuted on the Nasdaq in March 1994 at 11.75. The firm was a holding company for a string of fast food and casual dining restaurants, including Burger King and Chili's Grill & Bar restaurants. Later, it added holdings on the franchiser side.
The stock began thin. When the 50-day moving average first formed, daily was 45,300. When the 200-day line first appeared, daily volume was 16,900.
After its IPO, the stock consolidated for 15 months before gaining altitude out of a base. In June 1995, the stock cleared a 13.85 flat-base . By June 27, volume surged three times its usual level, but that wasn't saying much; average volume was 22,000. Clearly, few funds showed much interest.
But over the next 11 months, the stock almost tripled — rising to 38.75 on May 23, 1996. (1) Who can argue with a 180% price gain in less than a year
Big-money investors apparently could. Volume was 2,400 on the day Quality Dining hit the 38.75 price peak. Average daily volume was 75,600 — still far from showing the kind of daily dollar volume that points to institutional enthusiasm.
Quality Dining wasn't standing pat. The company was making acquisitions — Spageddies Italian Restaurant and Grady's American Grill. But the big acquisition was announced in February 1996, when Quality Dining revealed it would buy bagel chain Bruegger's for about $141 million in stock.
Quality Dining stock ran up 80% in three months from February to the May peak but without gaining significant daily volume. The merger proved a mistake.
Less than a year later, Quality Dining sold Bruegger's back to its founders for about $45 million.
The stock price slid from the 38.75 peak to below 2 by October 1998. For the next 6-1/2 years, Quality Dining traded in a price range of roughly 2 to 5.
Quality Dining never recovered. The firm went private in 2005, giving remaining shareholders $3.15 for each share.
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