The Plot Thickens in 3-D Systems

 | Nov 14, 2012 | 12:00 PM EST
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On Friday I wrote a story about 3-D printing companies Stratasys (SSYS) and 3-D Systems (DDD). I had been reluctant to suggest jumping into positions in either, given that both have had lengthy run-ups this year, but said I liked the long-term potential for both.

Since then, a financial-news website has questioned accounting practices related to some of the 3-D Systems' acquisitions, and shares of the company dropped 8.3% on Monday as a result. It was the second report in less than a month to put the 3-D Systems' growth rate under the microscope.

But, focusing on the technicals, here's one thing I found interesting about Monday's pullback: The stock ended the session 0.2% above its 15-day moving average, so the move hardly signals huge technical damage. On Tuesday it fell further, but remained above its 50-day average, and the stock closed at the upper end of its intraday trading range.

It's not uncommon for news to send a stock sharply lower, but in this case the slide has ended above the 50-day line. In situations like this, the stock frequently offers a new entry opportunity as it rebounds from the pullback, regardless of the news.

Still, any time it seems as if you are hearing rising chorus of questions about a company's accounting, it's a good idea to steer clear, at least for the moment. I recall that, during one of Green Mountain Coffee Roasters' (GMCR) bouts of questioned accounting, Jim Cramer advised traders and investors to stay out of stocks that have these scandals swirling around -- and I have to agree with this bit of advice.

Granted, so far the articles about 3-D Systems are less damning than the assertions about Green Mountain's sales had been -- at least in terms of damage done to the stock. But this is where traders have to be alert, and that brings me to the bigger point that this episode drove home. When you're trading a mid-cap like 3-D Systems, only allot a small portion of your discretionary capital. This is certainly not the kind of stock on which you should be banking your retirement.

True, there are strategies that don't make any distinction between trades and retirement portfolios. This creates a mistaken impression that trading small- and mid-caps can be the key to bulking up a retirement account. Unfortunately, the risks inherent in allocating too much to single stocks -- particularly volatile names, such as 3-D Systems, which has a beta of 1.76 -- can outweigh potential benefits of being overweight in such issues.

So when you trade stocks like this, it comes down to relying on technicals to make your buy, sell and hold decisions. I'm sure a number of traders got shaken out of 3-D on Monday's news. But it's also clear that a good number held, and a glance at an intraday chart shows some tussle between buyers and sellers throughout Tuesday's session.

I don't have a financial interest in this stock, as it's not one that I currently own. Further, as I noted above, I avoid companies that may be drawing income-statement scrutiny. Yet I am curious as to whether contentions about accounting irregularities will send the stock lower again, if the story appears to have validity -- or whether traders will jump back in, giving the stock renewed technical strength.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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