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Recent violent drops in stocks such as Green Mountain , Chesapeake Energy and Netflix are tempting value investors to go against one of the oldest sayings on Wall Street: “Don’t try to catch a falling knife.”
“In buying falling knives, you have to distinguish between just setbacks and atrophy of business model,” said Stephen Weiss, hedge fund manager at Short Hills Capital Partners and veteran of Street research and trading desks.
In the latest example, shares of Green Mountain Coffee Roasters lost almost half of their value at their low Thursday after the maker of Keurig brewers and K-cups missed results and aggressively cut their sales outlook. The selling picked up following a conference call where executives seemed unable to even find an actual reason for the revenue shortfall.Our new $40 price target “is based on 14 times our full year 2013 EPS and incorporates the company’s lowered guidance for the current year,” said Nicole Miller, Piper Jaffray’s Green Mountain analyst, in a note to clients Thursday. While Miller downgraded the stock to “Neutral”, her new target (down from $65) represents a more than 45 percent surge from its price today.
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