Large declines in share price are, more often than not, indicative of an overall movement of a stock's industry, sector or market as a whole. For a long-term investor looking to find an entry point, these short-term price pull backs are often a blessing in disguise. But beware; corrections such as these are not always the perfect time to get involved.
A serious decline can also signal something much worse. Massive declines in the tech sector during the bursting of its bubble in the early part of this decade were more of a signal that the tech boom was over, rather than a perfect time to buy cheap. Any time one of your stocks takes a plunge to lower price levels, you must ask yourself, is there something fundamentally wrong with the underlying company or industry/sector? (For further reading, be sure to see our article Surviving Bear Country.)
Here are five stocks that have recently experienced a large one-week decline in share price. By exploring them further, we can be in a better position to help predict whether these large movements are a signal to steer clear, or pile all-in.
The Bear Cave
|Company||One Week Loss*||Community Sentiment|
|Morgan Stanley India Investment Fund
|MS Emerging Markets Fund
|* Data as of market close June 30, 2008|
Big Distributions Take A Chunk Out Of Share Price
A group of Morgan Stanley's (NYSE:MS) closed-end investment funds declared dividends on June 20, with ex-dates of June 26. The Morgan Stanley India Investment Fund (IIF) and Morgan Stanley Emerging Markets Fund (MSF) were the largest, distributing $8.62 and $4.31 per share respectively. These distributions are made up of the funds long and short term capital gains, and net investment income.
Huge losses in share price were seen in these two funds because of the large distributions. IIF dropped $9.13 or 28.0%, and MSF dropped $4.74 or 21.1% on the ex-dividend date, a little bit higher than the $8.62 and $4.31 that should have been seen (notwithstanding any other reasons for a drop in price other than the distribution). (To help with the understanding of dividend payout dates, read our related article Declaration, Ex-Dividend And Record Date Defined.)
With distributions this high, it is imperative to take a closer look to see if these funds are in a position to continue to impress. By taking a quick look at the balance sheets of these funds, we can get a better look at their current financial situations. On an annual basis, IIF has been growing its cash position very quickly. As of December 31, 2005, the fund had a cash and equivalents balance of just over $2 million - this was increased to more than $7 million at the end of 2006, and more than $50 million by the end of 2007! MSF has done the same, increasing its cash from $671,000 at the end of 2006 to over $2 million by the end of 2007. I like to see investment funds with free cash on hand, as it increases the chance that they will take advantage of opportunities as they present themselves. With incredible market volatility across the globe right now, a new opportunity to buy a company on the cheap is popping up every day.
One other thing that needs to be looked at when analyzing an investment fund - especially recently - is the amount of debt that exists. Much of the recent trouble in the financial sector has come from leveraging into risky investments. When I am looking at an investment fund, I like to see the liabilities very small when compared to the assets of the company. This tells me that even if the asset values drop sharply, the liabilities will not drown the fund. IIF, has liabilities of less than one-fifth of it's assets, and MSF has less than one-quarter. (To learn how to assess a company or fund's debt, read Debt Reckoning.)
Ignoring the recent drop due to the distributions, both of these funds have come down quite a bit over this past year. IIF has dropped almost 50% from an adjusted close of $40.74 to $22.51 YTD, and MSF has similarly fallen from and adjusted close of $20.13 to $17.78 over the same time period. The bears have definitely had their eyes on these two funds, as investors begin to become more nervous about the financial sector. As we get closer to a turnaround, though, I am looking for funds such as these to bounce back. But in the meantime, eight dollar distributions on shares that you only paid $40 for, is not a bad return for while you are waiting.
Add Your Two Cents
What do you think will happen with Morgan Stanley's funds going forward? Will large distributions such as these, continue to pay shareholders for holding these funds even as share prices fall? Be sure to join me (aytonmm) in the Free Stock Picking Community to share your thoughts and see what other investors are saying.
For further reading, be sure to check out our related article The Importance Of Dividends.