Trading Note #9: Buying a Battered Stock on Dividend Announcement

CSE is a stock that is beaten down in this mortgage crisis. Even though management affirmed that dividends will be paid as promised earlier, there are still shorts who believe that the dividend would not be paid (which was what happened in many other mortgage companies even though their managements also proclaimed great news before disasters struck).

So you would expect that when the company announced that a dividend of $0.60 will be paid this quarter, the stock should enjoy a small jump. Instead, the stock actually dropped a little. So I said, Wierd, and I went ahead to buy a bunch. Over the next few days, the stock kept tanking, all the way from $18 to $16.

1st Lesson: Don’t think that a battered stock will always jump on dividend announcement.

Well, I averaged down during the tanking, though I was thinking if there was some impending news that I was not privy to – that’s a very scary thought =). Anyway, what happened was that 1-2 days before ex-dividend, the stock started to jump up. There was very significant short covering by short sellers who do not want to end up paying the dividend (to the guy whom they borrowed the stock from). The stock jumped back up above $18. At that time, I was considering if I should sell into the short squeeze. The idea being that the short squeeze was artificial demand, so I should take advantage of that temporary dislocation, else the stock might drop back down significantly on ex-dividend date after the artificial demand has disappeared. This coupled with the possibility that the short sellers might resume shorting the stock again.

But I ended up not selling the stock. On ex-dividend date, the stock opened at $18 (the previous close would be $17.67 when adjusted for the dividend). The stock pretty much stayed above $17.67 during the session and thereafter. The fear of a price tank due to i) lack of artificial demand, and ii) resumed short-selling, did not materialise.

2nd lesson: It may not always be wise to sell into a short squeeze.

The first two lessons illustrate that in the stock market, anything can happen. That’s why its extremely hard to make money from short-term trading. I think the Value Investing is still the sure of making consistent profits in the stock market.

On a related note, NCT announced dividends a few days after CSE’s ex-dividend date. Well, unlike CSE, NCT soared when the dividend announcement was released. Again highlighting the fact that, you can never predict with certainty what would happen in the short-term.


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