Playing turnaround situations is a tough thing to do in the stock market. If a company’s share price experienced a material price retrenchment, it’s usually done so for a very good reason. Penny stocks are that way not because they want to be.
It’s useful scanning the market for 52-week lows and 52-week highs; the process of doing so helps in the generation of lists of stocks for further research.
One company that just experienced a major price reversal on the stock market is Strayer Education, Inc. (STRA). This company provides postsecondary education and degrees online and on campus, and offers executive Master of Business Administration degrees in collaboration with the Jack Welch Management Institute.
The company’s share price bounced off a 52-week low, soaring approximately $13.00 a share to just over $47.00 after announcing 2013 fourth-quarter earnings that substantially beat the Street. Strayer Education’s one-year stock chart is featured below:
Big price moves like this on the back of much higher-than-average trading volume are worthy of further examination as a potential turnaround trade. A stock market speculator could have bet on the company’s earnings results, but this would’ve been total guesswork and an enormous risk. A better bet might be one directly related to the price reversal’s continued momentum on a near-term basis.
Strayer Education said that its fourth-quarter revenues fell 13% to $124.1 million compared to $141.9 million for the same period in 2012. The company experienced higher revenues per student but lower enrollment.
2014 winter term student enrollment dropped 14% to 41,098 students and company management implemented a restructuring of campus operations, resulting in a $55.0-million charge in the fourth quarter, saving $50.0 million a year in operational expenses.
Net loss was $19.0 million in the fourth quarter of 2013 compared to earnings of $16.6 million.
The company actually finished the fourth quarter with a strong cash position of $94.8 million. It only has 10.8 million common shares outstanding, which accentuates the price moves on the stock market.
Excluding the restructuring charge, Strayer Education’s adjusted earnings handily beat Wall Street consensus, and analysts are likely to boost this fiscal year’s earnings estimates.
On the surface of the company’s operational results, it doesn’t look like the business is doing that great, but that’s not what the trade is necessarily about. Instead, it’s about beating consensus and having this development recognized by institutional investors.
Wall Street and the stock market generally love corporate restructurings as one-time expenses hopefully yield much greater savings over time.
Momentum trading definitely can work in favorable, liquid markets. (See “Buy High, Sell Higher: Top Investment Strategy for Buoyant Markets?”) Investor sentiment currently in the stock market is strong enough to carry positions much higher on better-than-expected news. But it is a risk capital game, and knowing when to get out of positions can be difficult.
This is where strong risk management plays a greater role with this kind of investing. Stop/loss limits or stop out limits to preserve profits are very useful and can either be imposed informally or set specifically with your broker.
Scanning the stock market for 52-week lows and 52-week highs always yields new opportunities. It’s a very simple and easy daily task that can generate some very good trades.