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When Others Sell, Don't Panic, Investigate

Real Money's Paul Price explains why he's investing in this kitchen cabinet company while others are selling.

If there is one lesson that we emphasize here at TheStreet, it is this: do not sell in a panic. Just because prices have fallen doesn’t mean that you should unload your own stocks. In fact, it often means just the opposite.

Price writes, "What should you do when a holding plunges in the absence of news? You'd be surprised how often that question comes up. My answer is always the same. If there is no known reason for a significant decline, it usually pays to hold tight, or even buy more."

Over on Real Money, Prices says that when this stock gets sawed down, he's a buyer. Read more of his investing ideas and analyses in this column: Here's a case study in how sometimes when a great stock plunges on no real bad news, you should stock up.

American Woodmark  (AMWD) - Get American Woodmark Corporation Report, he says, is now that kind of stock. "This maker of kitchen cabinets and bathroom vanities is a fabulous company based on its long-term record."

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"Amazingly, one slightly disappointing quarter, due to surging lumber prices which are a key raw material for AMWD, tanked the stock from $108.81 last March to just $74.26 [recently]." Shares of American Woodmark closed at $78.50 Monday.

But Price points out that lumber prices have settled down and "AMWD implemented price increases to make up for the short-lived earnings hit those wood price increases caused."

If this is a story Street investors have seen once, they’ve seen it a hundred times. A thousand. American Woodmark, Price says, is a healthy company with great fundamentals. They have sold well and made up for fluctuating raw material costs with price changes. Yet a dip in sales sent the technical traders running, cycling American Woodmark’s stock down by more than 16% in just the past three months.

Get more trading strategies and investing insights from Price and the other contributors on Real Money.

When stocks plunge, smart investors should ask why. What has happened to cause a company’s price to decline so much? Look into the fundamentals before you join the stampede out of a position. Unloading your own shares too quickly might lead you to take losses on a healthy company. It also might rob you of the chance to buy in on an undervalued asset before it starts to bounce back.