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On a regular basis, a company will announce a quarterly earnings number that is less than the analysts expected. This usually causes a large drop in the share price the following day.

So how do you protect yourself from these sudden drops?

  1. You should know the date of the quarterly updates for your major holdings. If you see the stock moving up for a few days before the announcement, you may want to take some of your earnings off the table and lock in your profits. You can always jump back into the stock if the price continues to move up. The opposite of this is also true, if you start to see the stock price drop for several days before a quarterly announcement, assume that insiders are getting out early and join them in leaving the company.
  2. You should setup your account to automatically get you out of a stock if it has a major price move. This should be standard practice for all of your holdings as it will protect you in the event that news breaks that adversely affects your holding or the market in general. Your broker should have a way of allowing you to do a conditional trade. A conditional trade should be set up like this: Sell 100 shares of XXXX as a market order if the price of XXXX drops over 7% in a single day. This order is different than a trailing loss order as it is only looking for a rapid drop in a single day rather than just a gradual decline over the course of time. You could have a trailing loss order of 10% but the conditional order will get you out faster if the stock is moving very rapidly due to bad news.
  3. If you are watching the quarterly announcement of your holding, you can easily check what the after hours trading is doing based on the news. If you see the stock has dropped, then you can let your conditional order save you. If you think the reaction is incorrect and you want to weather the short-term loss, you can log into your account in the evening, cancel your conditional order, and then replace the conditional order at about noon the following day after the market has stabilized. Most bad news will change the stock price in the first hour or two of trading if it is just going to be a quick correction. If the price is still rapidly dropping at noon then you may want to exit the stock as well, as the news is probably worse than you thought.

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Company name Balchem Corporation
Stock ticker BCPC
Live stock price [stckqut]BCPC[/stckqut]
P/E compared to competitors Fair

MANAGEMENT EXECUTION

Employee productivity Good
Sales growth Fair
EPS growth Good
P/E growth Poor
EBIT growth Good

ANALYSIS

Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $48.53
Target stock price (averages with growth) $56.04
Target stock price (averages with no growth) $41.76
Target stock price (manual assumptions) $46.22

The following company description is from Google Finance: http://www.google.com/finance?q=bcpc

Balchem Corporation (Balchem) is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries. The Company has three reportable segments: Specialty Products, Food, Pharma & Nutrition, and Animal Nutrition & Health. The Company sells its products through its own sales force, independent distributors and sales agents. The Company operates five wholly owned domestic subsidiaries, such as BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Trading BV and Balchem Italia Srl. The Food, Pharma & Nutrition (FPN) segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Balchem’s Specialty Products segment operates in industry as ARC Specialty Products.

 

Confident Investor comments: At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns. I am leaving this company on my Watch List since it barely missed a Good company rating. Also, my list is very low on industrials and I am hesitant to cut one at this time.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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Company name Ascena Retail Group Inc
Stock ticker ASNA
Live stock price [stckqut]ASNA[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Poor
Sales growth Good
EPS growth Good
P/E growth Fair
EBIT growth Good

ANALYSIS

Confident Investor Rating Good
Target stock price (TWCA growth scenario) $24.58
Target stock price (averages with growth) $29.89
Target stock price (averages with no growth) $20.69
Target stock price (manual assumptions) $24.23

The following company description is from Google Finance: http://www.google.com/finance?q=asna

Ascena Retail Group, Inc. (Ascena) is a national specialty retailer of apparel for women and tween girls operating, through its wholly owned subsidiaries, the dressbarn, maurices, and Justice brands. As of July 28, 2012, the Company operated over 3,800 stores throughout the United States, Puerto Rico and Canada. Ascena operates under three brands: dressbarn, maurices and Justice. In January 2011, the Company completed an internal corporate reorganization and established a holding company, Ascena Retail Group, Inc. In June 14, 2012, the Company acquired Charming Shoppes, Inc., an apparel retailer specializing in women’s plus-size apparel.

 

Confident Investor comments: At this price and at this time, I think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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I don’t try to predict why a stock is going up based on market conditions. That strategy is simply fraught with danger that I try to avoid.

I frequently get emails, comments on my site, or Twitter questions regarding my opinion on a particular news story. The questioner is almost always asking for my opinion on the news’ affect on a certain stock.

I strongly urge investors to not worry about such details. I realize that Jim Cramer of Mad Money will often discuss the reaction of a stock to a news item. As a case in point, Mr. Cramer recently tweeted on news of gasoline prices potentially dropping and its influence on the retail segment. Jim is incredibly smart and immensely popular. I enjoy watching his television shows. However, I think that using this information to control your investment is unwise for the individual investor.

As I pointed out in an earlier article, the influence of the news on a particular stock is typically extremely short lived. There was a recent study by an analyst  firm that looked at the help wanted ads for Microsoft [stckqut]MSFT[/stckqut] in order to get an insight into Microsoft’s focus for development. I laughed when I saw that story. The recruitment process by a company has nothing to do with the immediate quarterly success of the company. The long-term success of the company obviously depends on its future investments (which I wrote about here) but to try to predict the success of the company based on who they are going to hire in the short-term is giving far too much omniscience to the analysts doing the study.

I honestly do not think that it is necessary to make such deep analysis to be successful. As I teach in my book, The Confident Investor, most of the analysis can be reduced to a 10-year analysis on 4 different metrics combined with a current analysis of two more metrics. This gives you the capability of finding truly exceptional companies. You should grow your investment in those Good Companies using technical trading tools that control your trades.

It is entertaining and educational to listen to Jim Cramer explain how the various macro factors affect a company or an industry. I am sure that he is often correct. However, I don’t suggest that the individual investor repeats this effort.

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

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Company name Atlas Pipeline Partners, L.P.
Stock ticker APL
Live stock price [stckqut]APL[/stckqut]
P/E compared to competitors Fair

MANAGEMENT EXECUTION

Employee productivity Good
Sales growth Good
EPS growth Good
P/E growth Good
EBIT growth Good

ANALYSIS

Confident Investor Rating Good
Target stock price (TWCA growth scenario) $55.06
Target stock price (averages with growth) $51.35
Target stock price (averages with no growth) $25.89
Target stock price (manual assumptions) $47.35

The following company description is from Google Finance: http://www.google.com/finance?q=apl

Atlas Pipeline Partners, L.P. is a provider of natural gas gathering and processing services in the Anadarko and Permian Basins located in the southwestern and mid-continent regions of the United States; a provider of natural gas gathering services in the Appalachian Basin in the northeastern region of the United States and a provider of natural gas liquid (NGL) transportation services in the southwestern region of the United States. Its general partner, Atlas Pipeline Partners GP, LLC (Atlas Pipeline GP), manages its operations and activities through its ownership of its general partner interest. Atlas Pipeline GP is a wholly owned subsidiary of Atlas Energy, L.P, as well as the 2% general partner interest. The Company conducts its business in the midstream segment of the natural gas industry through two segments: Gathering and Processing and Pipeline Transportation. On December 1, 2012, the Company acquired Cardinal Midstream, LLC.

 

Confident Investor comments: At this price and at this time, I think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.