When I worked for an equity hedge fund, we had a simple saying around the office - "When in doubt, sell it out". In other words, we often felt that if we had any real uncertainty about a company's prospects, it just did not pay to hold on and hope for the best. After all, the cost of selling a stock ahead of potential bad news and buying it back later if we were wrong was often just pennies a share; far less than holding it through bad news.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Perhaps that is what holders of Ritchie Bros. Auctioneers (NYSE:RBA) were thinking yesterday. The stock dropped sharply on high volume after the company announced a mid-quarter update call after the close on Thursday. While some companies make a habit of mid-quarter updates, Ritchie Bros. is not one of them. What's more, mid-quarter updates are often much like getting a call from your lawyer saying "we need to talk" - it is almost never good news.

Things have been rough of late for this leading auctioneer of used industrial equipment. The company missed estimates in its last quarter by a significant margin, and top-line performance (that is, revenue growth) was not impressive. Worse still, the company has been positioning itself for a recovery in the business by hiring more employees. Although that makes a great deal of sense for the long term, the short-term impact is higher expenses and very little incremental revenue to offset them.

Making a tough situation even harder, there are factors preying on this stock that the company cannot control. Rival IronPlanet has filed to go public and its filings with the SEC indicate that this company has been growing considerably faster than Ritchie Bros. So although Ritchie Bros. is several times larger, the question is now out there as to whether it is losing share and whether IronPlanet's online-only model is the wave of the future. (For more, see IPO Basics: What Is An IPO?)

On top of that, there is the economy itself to worry about. Right now, it feels as though we are in a reverse-Goldilocks situation - the porridge is just precisely not-right. There are enough signs of life that companies do not want to dispose of equipment and get caught short, and those who would like to buy are worried about over stretching themselves and are having a difficult time getting banks to extend loans for expansion.

A Dearth of Peers
Unfortunately, there are not enough companies in the public market to really round out visibility. Sotheby's (NYSE:BID) sells art, not backhoes, and eBay (Nasdaq:EBAY) is far more consumer-oriented. Consequently, the sometimes-good, sometimes-bad reports we have been seeing about Sotheby sales (like the record-breaking Turner sale and the commission to sell Lehman's art) mean nothing here.

Nevertheless, there may be encouraging signs of life if you dig deeper. Caterpillar (NYSE:CAT) executives have said they see prices for some types of used equipment going up, and other private resellers seem to be corroborating this.

The Bottom Line
I see no reason why a potentially weak second quarter should permanently chase off Ritchie Bros. bulls. Management has chosen to respond to near-term difficulties by investing in future growth infrastructure and that is one of the hallmarks of long-term winners. Consequently, I do think the company will be well-positioned to profit off of the eventual recovery in the U.S. economy. (For more, see The Characteristics Of A Successful Company.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Home Depot's Return on Equity (ROE)

    Discover what Home Depot's return on equity (ROE) ratio says about the performance of the company and how it relates to historical averages and industry trends.
  2. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  3. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  4. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  5. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  6. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  7. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  10. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center