Lessons From Investing in a Losing Stock

This article was last updated on February 5

Want to tell you a story about my trading history with Brocade Communications (BRCD). This was one the first stocks I bought after moving to the US. It had just announced good results and was trading around $10.50, There were some good articles about it and I saw some positive news stories about it. The fundamentals looked good, solid ratios, analyst buy ratings, no debt and it was in a duopolistic market – the only other major competitor was Cisco.

Yet today the stocks stands at $7. (It was down to $6 a few weeks ago and has had a run up before the earnings announcement today). So why did the stock drop so much, even though I did my homework? Well here are some reasons I think why :

– They had just been through SEC investigation for options backdating. Even though they paid a fine and had new management in place – this should have been a big red flag to me. It only takes one mistake for a company to lose it’s reputation but it takes a lot of time for a company to get it back. Institutions probably didn’t want to buy it until new management has a better track record.

– Their biggest competitor is Cisco- CSCO (up 5% in the last 7 months). I should have realized that Cisco is a much bigger, better established company. It has better margins and was more diversified! It was as they sat best of breed in the sector and I possibly should have bought this stock instead. I did do my research and that time felt BRCD had better relative growth prospects.

– Seasonal factors! Tech is normally weak during the summer. Brocade is a tech stock! I should have factored this in and waited to buy the stock

– Before and After the positive earnings announcement in Jan (just before I bought the stock), the share price ran up about 30% – so I bought at the peak. I should have waited and had patience.

Anyway, I am still holding the stock as I do believe in the long term it is a good company in a growth sectors (Networking and storage management). I am not selling anytime soon and hopefully their future earnings will improve. If the earnings and forecast are poor – I will probably sell and take the loss! However I will not forget the factors I should consider for my next investment.

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