How to Survive the VeriFone Slide

TheStreet.com

NEW YORK (TheStreet) -- If you own shares in VeriFone Systems , last week's earnings release has you feeling like anything but paid. Just don't sell your stock right now.

The right time to sell was when TheStreet's contributor Richard Saintvilus warned you that VeriFone faced headwinds from the growing popularity of smartphones.

If you missed Saintvilus's first warning when VeriFone's stock traded above $30, he sent another warning shot across the bow ahead of the most recent earnings release. If you also missed his second caution, it's time to follow him on Twitter, so you don't miss his next one.


After tolerating this much pain, you may want to continue for a little longer, if only to receive an additional 5% to 10% than you could yesterday. Typically, when a stock gets taken back to the woodshed after a poorly received earnings release, it takes two to four days for the market to absorb the information.

During that time, stocks usually overshoot the mark as panic selling forces the hand of many to exit at the worst possible time. The over-reaction creates an opportunity for short-term active investors as well as shareholders wanting to exit gracefully.

PAY Revenue Quarterly Chart
PAY Revenue Quarterly data by YCharts

As you can see by the chart above, revenue and gross profit are not far off from the same period a year ago. The biggest difference is that VeriFone's stock traded for greater than double the price at the time of writing. The earnings multiple has fallen even faster than the share price. The trailing P/E ratio is a portfolio killer 103, while the forward P/E ratio is a polar opposite bargain buy near 10.

PAY EPS Diluted Annual Chart
PAY EPS Diluted Annual data by YCharts

When the company is viewed from an earnings-per-share perspective, it becomes clear why the market reacted with a gap lower followed by continuous selling. For active investors able to maneuver quickly, I wrote a short-term trade idea in Real Money Pro that includes my idea on how to profit from options and/or stock. If you don't already have a subscription, you can get a free trial.

If you want a longer-term insight on what to expect, you may wish to consider the chart patterns and see previous articles I wrote about post-earnings reactions and what to expect. You can read two here and here.

What you will find is after three days of downward price pressure stocks tend to bounce higher (some call this a dead-cat bounce), if only for a short period of time.


After an earnings-related drop with the magnitude of VeriFone System's decline, the company will need to deliver at least two strong earnings quarters before investors can expect a full recovery.

If your holding period is measured in years, last week's decline may not constitute any action. On the other hand, if you're hoping to exit within the next month for more than $22, the odds are not in your favor.

Buy-and-forget-about-it value investors should wait at least two months before entertaining a purchase. Otherwise, anticipate VeriFone's shares to trade in a range below the gap fill price while painfully trending lower.

It a nutshell, it takes time to rebuild investor confidence, and you won't miss the train if you don't hurry.

At the time of publication, the author held no position in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

Rates

View Comments (1)