So What Is a Sympathy Sell-Off?
A sympathy sell-off occurs when investors in one company react to another company’s bad news. If two companies manufacture widgets and company A reports a weak quarter investors may sell company B anticipating earnings will be weaker than expected. The sell-off may be a buying opportunity when fears are unfounded or already discounted. Perhaps, company B makes better widgets and the poor results of company A are the result of a loss in market share.
Alternatively, company B may have already been priced for a slow-down in orders. The sell-off may then be over-discounting a real problem, but investors could be more bearish than is warranted. Clearly the first case is the best buying opportunity, but the second may offer a good chance to pick some shares up on the cheap if you are constructive on the the company long-term.
Ok, Makes Sense: But What’s On Sale Today?
Last Friday Accenture Plc (NYSE:ACN) delivered profit that exceeded Wall Street’s expectations at $1.14 per share versus $1.03 for the previous year. However, the company came up short on the top-line with revenues declining 5.8% year-over-year from $7.42 billion to $7.20 billion. Accenture Plc (NYSE:ACN)’s shares were hit quite hard on the disappointing news, declining by over 10% to $72 per share.
Due to Accenture Plc (NYSE:ACN)’s results, shares of several companies in the same sub-industry declined in sympathy. Accenture Plc (NYSE:ACN) is a global leader in information technology and consulting with operations in 54 countries serving 19 industry groups. While the IT and consulting sub-industry performed quite well in 2010 and 2011, more recently levels of caution have risen for discretionary spending among businesses, particularly in Europe. Let’s examine a few competitors that sold off and see if they represent buying opportunities.
The challenging aspect of investing in Cognizant Technology Solutions Corp (NASDAQ:CTSH) is that buying shares in a hyper-growth company after growth has slowed can be very frustrating. Since May of 2011 the TTM P/E of the company has compressed from 33.75 to under 18. If growth continues to slow, price appreciation may be difficult for several additional years and Cognizant Technology Solutions Corp (NASDAQ:CTSH) may continue to lag the market. The company is a good name to watch, however, I would wait to buy until revenue growth has stabilized.
In mid-April International Business Machines Corp. (NYSE:IBM) reported earnings that were very similar to Accenture, with earnings missing slightly at $3 per share, while revenue fell 5% from one year earlier. While this might seem familiar to you, the market apparently has a very short memory and promptly sent International Business Machines Corp. (NYSE:IBM) shares lower for a second time. However, if IBM’s disappointing results were already discounted, what difference does the Accenture report make? Furthermore, because the price of International Business Machines Corp. (NYSE:IBM) already recovered after its own disappointing report, it seems very likely that it will be able to recover from a competitors disappointing report.