Exide Technologies: Anatomy of a Mistake
Tom Konrad CFA
On June 1st, in the lead up to Exide Technologies’ (NASD:XIDE) first quarter earnings announcement, I made one of my better calls so far this year. I wrote that the Exide stock was in the “bargain basement” and “ready to pop.” That day, XIDE traded in a range of $2.25 to $2.36, within spitting distance of its 52 week low of $2.22. Four months later, the stock is up 45% at $3.25, despite two earnings misses in the meantime.
Unfortunately, I missed out on a good chunk of that gain. A week later, Exide announced disappointing first quarter earnings, but the stock popped. The company had made good efforts reducing expenses and improving operating margins in its reorganization, and cash flow was also improving, but this did not seem sufficient to explain the big stock price pop when we would normally expect at least a small price decline.
I eventually settled on the theory that it was due to some press confusion between XIDE and Indian auto parts manufacturer Exide Industries (NSE:EXIDEIND, BSE:EXIDEIND,) combined with short covering. I sold my stock at $2.80 in the expectation that the market would soon sort this out, and another buying opportunity in the low $2 range would soon emerge.
I was wrong. Over the last five months, XIDE only briefly fell below $3, because of another negative earnings surprise in August and accompanying analyst downgrades. Yet XIDE resumed its rally, propelled by recent news like a new contract with Pep Boys (NYSE:PBY).
What Really Happened
I think I was right about the stock pop, but I was not the only one to spot Exide as a turnaround story. Despite the unexpected rise in June, Exide was still a good value at $3, as I wrote in a comment to a reader. While I was expecting short term market dynamics to propel the stock down, analysts at Wedbush raised their price target and a prominent newsletter upgraded Exide as well (I read about this in an news interview with the newsletter writer a month later, but unfortunately, I can no longer find a copy of the article or recall which newsletter.)
Eventually, I repurchased my stake at an average price of $3.07.
My decision to trade XIDE on short term market dynamics cost me 12% of the potential 45% gain so far from my June 1 call. This is why I usually avoid short term trading: it adds to expenses, and new information (in this case the upgrades) can lead to rapid changes in market dynamics. I’ll try to remember that next time I come up with an equally compelling story explaining short term market dynamics.
Disclosure: Long XIDE
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