NEW YORK (TheStreet) -- Tuesday's trading session left more than one Nuance Communications (NUAN) investor wondering if the bottom would ever arrive after the company that makes voice-recoginition software issued a disappointing outlook for its fiscal first quarter and 2014 on Monday.
The market typically requires at least one more and often two days to digest such bad news, presenting a buying opportunity known by Wall Street as a "gap-and-crap" event, which is a gap lower followed by continued selling.
Although obviously we can't predict the future, after studying earnings and outlook disappointments over the years, I don't get surprised often. Let's first examine what the heck happened to start the free-fall and discuss quick trade and long-term investment ideas.
If you haven't read TheStreet's Herb Greenberg's post earnings analysis, take the time to do so. It's well done and sums up why investors couldn't dump their shares fast enough, especially in the first hour Tuesday.
BlackBerry (BBRY) uses Nuance's software, and its announcement that it is withdrawing from handsets and laying people off doesn't help. That news, however, was already reflected in Nuance's stock price.
Apple (AAPL) is an unknown that has the potential to drive Nuance's revenue, but even if it does, Nuance's stock may not benefit much because it is already priced for high growth with a price to earnings-to-growth ratio of almost four.
The same applies for mobile in general as mobile is a popular buzzword these days. If a company is able to report mobile is growing, investors are willing to overlook almost any other issue. But you should be careful.
Again, you need to already be convinced that averaging down is an excellent idea because trying to break even for the sake of breaking even is a losing strategy. Assuming you own shares at $18 and can now buy the stock at $13, adding an equal number of shares to your current position will push your cost-basis average down to $15.50.
The second part of the repair is hedging the position by selling an April $15 call for about 85 cents. The April expiration is 143 days away, allowing enough time for a recovery if it's going to happen and lowering your effective cost basis and risk to $14.65.
At the time of publication, Weinstein had no positions in securities mentioned. Follow @RobertWeinstein This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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