NEW YORK (
) -- As value investors, we tend to want to buy companies on the cheap. We're always on the lookout for the veritable "50-cent dollar". That sometimes entails buying what no one else wants -- companies that are beaten up more than they deserve.
When there is a mass exodus form a particular stock, and the selling pressure decimates the price, the objective is to determine whether the market has overreacted.
Whether you believe in market efficiency or not, there are countless examples where the market has gotten it wrong. Frankly, I am a big fan of market inefficiency for that very reason. It can create wonderful buying opportunities at times.
But just because a stock loses a rather large percentage of its value in a given trading day does not make it a screaming buy. There are situations that are so ugly that even the bottom fishers and garbage fishers should stay away, at least until the dust settles. Often, such situations arise from a terrible earnings report that has longer-term implications.
It's easy to fall into the mentality that a 20%, 30% or 40% decline in one day in a stock is an overreaction until you consider that maybe the market was overvaluing the stock before the selloff.
One name I've been watching for some time is toy company
(JAKK - Get Report)
. The company has seen sales fall for four straight years, but its rather clean balance sheet, ample cash, and somewhat recently established dividend have made it attractive as a potential value play.
In fact, back in September of 2011,
Oaktree Capital Management
(Howard Marks' firm) made an unsolicited $20 takeover bid for the company.
Jakks rejected the offer, and then another activist group got involved which led to an expansion of the company's board of directors. The company ultimately bought back 15% of outstanding shares in a self tender offer at $20 a share, but it has been downhill from there.
On Wednesday night, the company issued an awful second-quarter earnings report. Revenue, which fell nearly 27% to $106.23 million, was well below the $147.74 million consensus estimate. The company lost $2.14 per share for the quarter, well below consensus estimates for a loss of 5 cents. Although this is a small company, there are seven analysts following it, so this was quite a surprise.