I just love catching falling knives, and last year at this time, Mr. Market gave me the opportunity to do so on shares of Lexmark. As discussed here, Lexmark fell a whopping 25% after a pre-earnings announcement that missed expectations, and then led the decliners list *again* after its actual earnings announcement. (I guess Mr. Market doesn't believe in double jeopardy?) Today, Lexmark's shares have more than doubled from where they were then.
Though in slow decline, Lexmark has a pretty steady business. It has a bunch of printers out there, whose users are somewhat captive in that they keep buying Lexmark's ink. For Lexmark to trade at a P/E of 5 with a net cash position seems pretty ludicrous, especially when the company was deploying a large part of its income towards buying back shares.
But Mr. Market does panic. The trick for investors is to figure out when the panic is justified and when it's not. For companies trading at high P/E's, it's much harder to tell if a price drop is unjustified, because estimating growth rates is so hard. For companies trading at single-digit P/E's where the business model suggests rather steady cash flows, it's much easier.
Lexmark was the latter. But at its current price, with revenues continuing to decline, now may be a good time to sell it back to the emotional Mr. Market.
Disclosure: No position
Though in slow decline, Lexmark has a pretty steady business. It has a bunch of printers out there, whose users are somewhat captive in that they keep buying Lexmark's ink. For Lexmark to trade at a P/E of 5 with a net cash position seems pretty ludicrous, especially when the company was deploying a large part of its income towards buying back shares.
But Mr. Market does panic. The trick for investors is to figure out when the panic is justified and when it's not. For companies trading at high P/E's, it's much harder to tell if a price drop is unjustified, because estimating growth rates is so hard. For companies trading at single-digit P/E's where the business model suggests rather steady cash flows, it's much easier.
Lexmark was the latter. But at its current price, with revenues continuing to decline, now may be a good time to sell it back to the emotional Mr. Market.
Disclosure: No position
