U.S. Markets closed

What Goes Down Must Come Back Up? Not In Stock Market

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.