Sometimes you actually profit from a bad trade, but you should still learn from the experience. Back in early June, I took a position in retailer At Home Group (HOME) , which had just been trounced following the release of first quarter earnings. HOME fell 57% on June 6th as a result of weak forward guidance. I've been somewhat active in the small specialty retail space the past few years, occasionally finding situations where I believe that the market has overly punished names in the sector, creating the proverbial "fifty-cent dollar", and HOME seemed to be the latest opportunity.
The mistake that I made was in presuming that HOME was truly cheap for the mid-$8 price I paid for it. Just because a name falls from $17.51 to $7.50 over one day (which is what happened to HOME on June 6th), does not make it cheap. Perhaps the $17.51 price was the real problem. Perhaps HOME's price was overly inflated, $7.50 was more realistic, and this was not a "fifty cent dollar" but rather a situation where the price adjustment was warranted and the market had it right after all.
While buyout rumors floated around and drifted away, the stock had much further to fall, sliding below $5 in early August. Second quarter earnings, released in early September, did not help matters. While HOME reported better than expected earnings, revenue was below expectations, and several firms then cut price targets to $10 and below. However, shares have actually drifted higher since then on no news and average volume, and on Thursday I closed the position in the low $10 range for an 18% gain. That, I might add, was a lucky gain and there was no skill involved.
The lesson is this: If you are going to buy a name that has recently been hammered, it may be better to wait and let the dust settle before pouncing, especially following such a devastating punishment like the one HOME received on June 6th. In this case it fell an additional 38% after closing that day at $7.50. The savvy investor that pounced on HOME below $5 in August has now more than doubled their money. I am limping away with an 18% gain, knowing that it was not a smart trade. Live and learn for the next time.
While inefficiencies do still exist, especially in smaller names, the market does not always get the story wrong.