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

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  6. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  7. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!