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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerThere's an old saying on Wall Street: don't try and catch a falling knife. This simply means don't try to buy a stock making new lows before it begins showing some strength. I've tried to catch a falling knife before in The Bon-Ton Stores, Inc. (NASDAQ: BONT) here and it ended up humbling me, to say the least. I think that Tuesday Morning is a falling knife and you, the investor, should avoid being the cutting board into which this knife stabs.
Tuesday Morning revised its outlook yesterday and it wasn't pretty. Before this cut, analysts and management were expecting roughly 85 cents per share in earnings for the year; however, management brought its expectations down to about 60 cents per share on greatly-reduced sales estimations.
You might say, "But even if the company only earns 50 cents per share next year this stock is cheap at less than $5 per share!" Additionally, you'll probably reference the fact that the stock is currently trading for book value. Surely, this must be a bargain stock... right? Wrong! This is a classic value trap.
First, let's take a look at the company's operations. Why are they struggling? The primary explanation for the company's weak performance and outlook is its strong ties to the housing market and consumer spending. Although consumer spending hasn't (yet) been significantly weakened, anyone with a pulse is well aware of the troubles in the housing market. These troubles are understandably taking their toll on this company's ability to sell home goods and furnishings. This entire situation is forcing Tuesday Morning to lower their prices and, therefore, hurting the company's top and bottom line.
But if the housing market is cyclical and will ultimately turn around, why should you not buy Tuesday Morning now and hold it until the housing market rebounds? Considering the stock once fetched $35 per share, buying the stock for under $5 must make sense. Unfortunately, I think the company is losing significant market share in the home goods space -- a development that will have repercussions, regardless of the state of the housing market.
Additionally, from my own research I've found that the majority of Tuesday Morning 'regulars' have been very dissatisfied with the company's current product selection and the most recent catalogue hasn't done anything to appease them. While this might seem insignificant to the strictly number-crunchers among you, I think it's very important: if the company loses even more loyalty (and more market share), it stands to miss it's already slashed earnings forecasts!
Lastly, I think the book number figure is going to face significant write-downs because the majority of the assets on the balance sheet are in the form of inventories. Considering the fact that the company is going to need to cut prices to sell these products, the figure is most likely inflated.
What should you do? I think that for most investors, there are easier and less risky situations to play than Tuesday Morning. But if you insist on getting involved, I'd at least wait until next quarter's earnings report so you can see how the company stands in terms of market share and margins.
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