StockWatch
The Time to Sell Is When the News Is All Good
I received more than a few angry email messages this past April concerning a column I had written about Akamai Technologies.
My crime, in these emailers’ eyes: I had the audacity to suggest that investors would do well to consider other stocks besides that of this red hot Internet company.
I admit that the information in my column seemed counterintuitive. After all, Akamai Technology was riding high at the time. The cover story in the then-current issue of Forbes magazine focused on the company, under the headline: “Video Prophet: How Akamai survived the dot-com bust to thrive on speed.” Its stock was trading close to a six-year high.
At least to those who emailed me to complain, investing in Akamai Technologies, Inc. (TICKER:AKAM) was a no-brainer.
This was precisely the problem, of course.
When an investment seems so obvious that investors stop subjecting it to critical scrutiny, smart investors will be rewarded for thinking not once, but twice, before making that investment themselves.
At the time of my April column, Akamai stock was trading for approximately $53 per share. It was trading in the low $30s in late August.
The study on which I based my April column had just been published in the Financial Analysts Journal. Entitled “Are Cover Stories Effective Contrarian Indicators?”, its authors are three finance professors at the University of Richmond, Virginia: Tom Arnold, John H. Earl, Jr. and David S. North.
The professors marshal lots of evidence that helps us understand why contrarian analysis is so often right.
In a nutshell, the problem with laudatory cover stories is not that companies being favorably portrayed are unworthy. It’s just that, by the time these cover stories appear, the stocks of such companies have, most likely, already been bid up into the stratosphere. This makes it unlikely that they can continue to outperform the market.
On the other hand, the problem with unfavorable cover stories is not that the companies being unfavorably portrayed don’t deserve the bad publicity. It’s just that their stocks have probably been punished too much already, making it less likely that they will continue to be market laggards.
There is nothing mysterious about why press coverage works this way, according to the professors. It’s just that, given the long lead time for cover stories to be researched, written and edited and for the magazines themselves to be printed and mailed, it’s unlikely that those stories will contain significant new information that hasn’t already been reflected in the price of the companies’ stocks.
Contrarians like to say that the time to buy is when the blood is running in the streets. Although I am not aware of an equally snappy phrase for when it is time to sell, that time will be one in which the news is all good.
Mark can be contacted via email at mhulbert@marketwatch.com.
