How to Handle a Stock That Is Acting Poorly
What do you do when a favorite stock suddenly drops?
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The PCE inflation report came in better than expected, but it isn’t doing much to help the market so far. Indexes are up slightly, with the S&P 500 up about 0.3%. Breadth is around 51%, but there are already close to 150 new lows out of the gate.
Most surprising is that the iShares 20+ Year Treasury Bond ETF (TLT) is lower and the 10-year yield continues to rise. Oil is higher, which isn’t helping, but CME FedWatch shows that the chance of an October rate hike has fallen to 35% from about 51%.
Interest rates are rising while the odds of a Fed hike are declining, which suggests deeper bond-market problems that will take time to resolve. This isn’t healthy for stocks, which is why we aren’t seeing a better response to the PCE news.
Handling a Poorly Acting Stock
On Tuesday I mentioned the weak action in one of my favorite names, National Energy Services Reunited (NESR), and I want to give a little insight into how I handle a situation like this. Every situation is different, but the biggest problem is usually a lack of information.
NESR dropped close to 20% in two days. I dug hard for a reason and could not find anything operational or fundamental. There was no news, no SEC filing, and no downgrade. My best guess is that one or more of the large early investors based in the Gulf have been cutting their stakes. Several of them registered their shares for resale back in May, and with the Iran war straining the region, they may have good reasons to raise cash.
However, I had no confirmation of what was going on, so I did the disciplined thing and took a partial stop. I still hold a fairly large position, but the easy thing to do in a situation like this is to ignore the discipline and hope there isn’t a problem.
Wednesday morning two analyst reports crossed on TheFly. Capital One initiated coverage with an Overweight rating and a $44 price target. That report was likely in the works before the selloff, but the analyst probably spoke with management before releasing it.
The second report came from UBS, which has covered the stock for a long time. Analyst Josh Silverstein said the two-day 20% selloff creates an attractive entry point for what he calls the best growth stock in oilfield services. He kept his Buy rating and $46 target.
There is still no clarity on what caused the drop, but these reports make it more likely that it came from legacy holders selling rather than a problem with the business. Both new targets sit near 70% above the current price, which shows the potential if the company keeps executing the way it has.
There was a small bounce at the open, but it faded, and I think the chart is the reason. The stock broke down, so now it has a poor chart, and there are traders who sell poor charts no matter what the analysts say. That has nothing to do with the news flow. It is simply the discipline some traders follow, and it can keep pressure on a stock for a while even when the fundamentals haven’t changed.
What I’m watching now is whether the stock can hold a bounce on normal volume. That would tell me the selling has run its course. If the stock can’t find support, then either the chart sellers and the big holders are not finished, or there is some other issue that I’m not aware of. I’ll be watching closely and will add to my position once I have a higher level of confidence that support is forming.
Game Plan
I continue to do little as I wait for some market stabilization. The NESR situation is a good example of my process. I want to buy, but the chart needs work and I’d like a little more clarity about the situation. Those are the same conditions that exist with most of the other stocks on my radar.
At the time of publication, Rev Shark was long NESR.
