The benefit from a competitor's bankruptcy outweighs economic weakness
I learned something new today. Several weeks ago I ended my successful, several year long short of Ford Motor Company after my correct call that the demise of General Motors and Chrysler would be beneficial for it. I hesitated to go long Ford and missed out on a huge multi-bagger move in the company's stock because I was still concerned about weakness in the auto sector and the overall economy. Here's what I learned after evaluating this situation:
At least for a trade, the benefit to a company's stock price that results from the bankruptcy of a major competitor outweighs any economic weakness...no matter how bad things are.
Check out the fantastic chart above (if I do say so myself ;)). In all three of these instances I determined early on that the bankruptcy of major competitors would be beneficial: Bed Bath and Beyond (BBBY) / Linens & Things, Best Buy (BBY) / Circuit City, and Ford (F) / General Motors and Chrysler.
Yet in all three instances I failed to pull the trigger on a trade because I was afraid that the economy is so bad and that this economic weakness will continue for some time to come. I went long BBBY in CAPS but was talked out of it by people in the comments section and ended the position. I ended my short of Ford in CAPS but did not have the stones to give it the thumbs up. And I did absolutely nothing with Best Buy.
The weak economy may indeed eventually suck these companies stock prices back down, but in the meantime these situations would have made one heck of a trade. Hmmmmm missed opportunities. Well, at least I'm learning. The educational aspect of CAPS is one of the things that I like best about it. If I wasn't blogging and writing my thoughts down like this I don't know if I would have noticed this pattern. I'm sure that this concept is simple to many, but apparently at least from a trading standpoint (and I rarely trade things short term, I'm more of a yield hound) these opportunities outweigh economic weakness.
I don't plan on making the same mistake a fourth time. The next time a company sees a major competitor go bankrupt or there is even a whiff that it might happen I am going to immediately give it a thumbs up in CAPS. Given the current state of the economy, I doubt that we'll have to wait too long for this situation to arise again.
I will attach a larger version of the above chart in the comments section below. I realize that nothing happens in a vacuum and in general that the markets have risen significantly over the past several months. That's why I included the S&P 500 in the chart for the sake of comparison (not to mention that outperformance of that index is the basis for the CAPS scoring system).