Chris Lau, KAPITALL Contributor: In a single day, the Dow declined 1.79% or 265.86 points, the Nasdaq dropped 2.38%, and the S&P 500 declined 2.3%. The decline for many stock indexes on April 15 2013 was significant for the market, because sentiment is reversing. Since mid-November 2012, markets rose steadily without interruption. Led by a sharp drop in gold, copper, and other commodities, the shift in sentiment to the negative will have implications for speculative investment ideas. Investors and speculators alike will be more risk-averse in the weeks ahead. [More Analysis by Chris Lau: Analyzing Notable Bearish Calls Made by Jim Cramer]
Typically, but not always, technology companies with both a market capitalization and a low share price of below $3 have more volatility, also known as “beta.” The share price of these companies will swing more wildly than the average stock. When risk aversion is higher, speculative investments with deteriorating fundamentals should be considered companies to sell. Deteriorating market conditions will make it difficult for struggling companies to obtain financing as their businesses weaken.
Conversely, companies in the midst of a turnaround are investments to hold or accumulate. Investors confident in the prospects of their business might want to add to their position, to average-down the price paid.
Comparative InvestmentsTwo companies that come to mind as contrasting examples are: Advanced Micro Devices (AMD) and OCZ Technology Group (OCZ). Performance: 1 Year OCZ was speculated to be a takeover target and in the midst of a turnaround. The company now has a market capitalization of $78.48 million at a recent price of $1.16. In late March, the company named Rafael Torres as its new CFO. Torres previously worked at Power Integrations, as well as PLX Technology, a networking equipment vendor. The bullish case for OCZ was negated this month, when the company received another notice of delisting. OCZ failed to file its quarterly results for fiscal quarters ending on August and on November 2012. The filing was due on April 8 2013. Last month, the company secured $30 million in loans, half being a term loan and the other half via a revolving loan facility. Investors should proceed cautiously with OCZ. Accounting challenges rarely end favorably.