A Market Beholden to Fear

 | Oct 26, 2012 | 11:55 AM EDT  | Comments
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,

tkr

When is enough selling enough? When do you oversell? I keep thinking of some of the quarters that were reported and how sellers came in both before and after, and how wrong the sellers were before and how wrong they could be after.

I keep thinking about two different examples this week that, frankly, are horrifying to me as an investor because they show how the market is totally beholden to scared people who don't know what they fear other than the fear of other sellers.

The first instance is Broadcom (BRCM). When it reported, the quarter was a clean beat and raise, mostly because it is levered to all of the sales being made in smartphones, and Apple (AAPL) and Samsung are its biggest and best clients. We all know it has the finest technology, and CEO Scott McGregor is highly regarded in the industry.

When the company reported, it immediately ticked up, as it should have given it's the only semiconductor to deliver on expectations and then some. The stock moved to $34 from $33.5 in the few minutes between the opening and when I interviewed McGregor. I joked with him how in this market, even as the company totally delivered on its forecast, there would be someone disappointed and another one scared, so why not take some of your $2 billion dollar cash treasure chest and go $33 big for 1 million shares. It was an absurd suggestion given where the stock was going. But the next day, the stock traded at $31.5.

I spent a huge amount of time trying to figure out what Scott, Stephanie Link, research director of my charitable trust (which owns the stock), and I were missing. Could it have been the cable box business? Hardly, given the numbers we have seen from the cable operators. Could it be a drastic decline in Apple and Samsung businesses that use Broadcom? Point blank, no. We know that from the quarters we just saw that's a false worry. Could it be the fiscal cliff? Hard to pin the tail on that donkey. Europe? That was answered on the call. Why else? Perhaps as a hedge, as part of some tech or semiconductor basket that knocked it down.

Whatever. I think the main reason it was going down was sellers wanted to get in front of other sellers and beat them out of it because it's tech. It doesn't matter that it was good tech, it was tech. And tech can't be owned, right?

The other situation? Timken (TKR), the ball-bearing and precision-steel company I visited last week in Canton, Ohio. It's no secret that Timken's business has been weak. It has a 4000-person division in China and has been crimped by the slowdown. It has big business in Europe. Its products are used in businesses that could be hurt by the fiscal cliff. The price of oil has come down and oil drillers use their products. So does the military.

All of those were excellent reasons to sell ahead of the quarter if the stock was up a lot. But if you took a longer perspective, you knew this was not commodity steel that can be dumped but proprietary steel that maintains its worth even in a slowdown. Plus, if China comes back on line, this one could roar. Sure enough, Timken reports the so-called bad quarter while China reports terrific numbers at last and the stock goes to $38 from $36. There was no reason to sell it at $36. That was a mistake.

What did Timken sellers fear? More Timken sellers on the weak quarter. What did they miss? Timken buyers who realized the stock would be weak and wanted in.

The conclusion: We presume that all selling is right at this moment. But I need you to recall Timken and think about Broadcom. Because one was wrong, and the other could prove to be wrong simply because the positive facts don't match the negative story.

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