Harley-Davidson Is a Great Example of Why Investors Should Weigh News Carefully
Harley-Davidson's (HOG) - Get Report share price jumped more than 20% last Friday. But the stock lost more than 10% of its value in Tuesday trading, highlighting why you should leave the day trading to professionals.
The stock finished down almost 11% on Tuesday.
The drop followed a note by a respected analyst who said Tuesday that an acquisition rumor last week that fueled the jump in share price was unfounded. The end effect: Harley Davidson may decline to its previous levels this week, perhaps as soon as Wednesday. Short-term speculation on news can be risky and unprofitable.
The company's sales have fallen in recent years. Last fall, the company revised its outlook for shipments for the following year and announced about 250 job cuts as part of an overall reorganization.
On Friday, private equity firm KKR & Co. was said to be interested in buying the Milwaukee-based motorcycle company. The reported purchase price was $65 per share, which was a big premium over Harley's Thursday close price of $45.30.
The subsequent price surge was the largest one day move Harley-Davidson shares had seen since early 2009 when the stock also moved 20%. Harley trading volume was 10 times greater than average daily volume. Some speculated that part of the massive move higher was due to the large short interest in the stock. Most recent data has indicated that Harley's short interest stood around 29 million shares in recent days, more than double what it had been this time last year.
During a short squeeze investors who have sold an upward-trending stock short, are forced out of their position and into a loss. That puts further upward pressure on the share price and increases the value of the stock to a value usually higher than what the real market price should be.
Today's decline stemmed largely from investment bank RW Baird analyst Craig Kennison downgrading the stock. Kennison lowered his rating to neutral based on the price move on Friday but maintained his price target of $54 per share.
Kennison, said that at this time there is no evidence of a possible takeover of Harley-Davidson by KKR. Kennison said that he was not aware of any credible source behind the takeover rumors.
The stock could fall further Wednesday if Kennison is right. The stock is still 6.3% higher than the closing price on Thursday, prior to the takeover rumors.
The situation involving Harley Davidson shows why investors looking for long-term gains should look carefully at news before making a decision. In that light, the company's sluggish sales are more important long range for investors than the recent, unfounded news.
Then again, it's better to own these stocks for a while and sell when they've reached a long-term peak. That enables investors to lock in well-earned profits.
Being in front of the news, or anything for that matter, is always better than reacting to it.
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This article is commentary by an independent contributor. At the time of publication, the author held positions in Tesla, Amazon and Netflix.