Zacks Investment Ideas feature highlights: DineEquity, Emulex and Calumet Specialty Products - Press Releases

For Immediate Release

Chicago, IL – November 1, 2010 – Today, Zacks Investment Ideas feature highlights features: DineEquity Inc. (DIN), Emulex Corp (ELX) and Calumet Specialty Products (CLMT).

Book Profits on Flawed Logic

The vast majority of people are unable to check their emotions at the door when it comes to money and the financial markets. The extent varies widely, but we are all guilty at some point.

Not Me, I'm Stone Cold With My Money

Have you ever uttered the phrase "I was right, but...", "I know it's past my stop, but the market is wrong!" or my favorite "those damn [traders, hedge funds, comic book villains, etc] are killing me". Guess what, that's the right side of your brain taking over the left side.

Behavioral finance is an interesting area of study. Mainly because looking at the psychology of an investor can shed some light on our own short comings as well. Just about every time I read an article on the topic I can think of a time when I or someone I know has displayed that exact same behavior.

But more importantly, Let's talk about how we can profit from the flawed logic that is rampant in the stock market. There are plenty of interesting areas, but I want to focus on what is known as Loss Aversion. Because where the market is right now, we can stand to make a substantial profit from the behavior.

What is Loss Aversion?

On the surface it sounds like common sense, investors want to avoid taking losses. However, the way they look at losses and the impact it has on their selling decisions is the key.

You may remember from PSYCH 101 that losing $100 has a much greater impact on your emotion than finding $100. What this leads to is a staunch opposition to selling any stock for a loss.

After all, the flawed logic says "It's not a loss until I sell it for one." So, we end up holding these losers just waiting for them to come back, sounds familiar doesn't it?

Okay, but How Do I Profit from That?

Stocks have been on a hot streak for some time now and that begs the question, when are we going to see a pull back? Will it be from weak earnings? Economic data?

Underwhelming quantitative easing?

Who knows when the pull back will actually happen, but one thing that is almost a guarantee is what investors will do when it starts. They will sell their winners.

We all will want to be less exposed to a weak or falling market, so we sell some stocks, but thanks to loss aversion, the market ends up flooding the stronger profitable stocks with sell orders. And the dogs that have done nothing will continue to do just that, nothing.

So, the moral of the story is, short stocks that are up sharply, especially those that don't deserve to be. They will get hit the hardest at any hint of weakness.

3 Sure-Fire Shorts

Here are some stocks that should turn into pumpkins, come midnight. If you don't like to or can't short, go ahead an buy some puts.

DineEquity Inc. (DIN) is a Zacks #5 Rank (Strong Sell) that was up over 60% in a few months. The shares have already started to slide, but it is not too late to get in.

Don't get me wrong, I love breakfast food, but IHOP owners shouldn't be trading this high. The company is also selling of company owned Applebee's restaurants, not a good sign.

Estimate revisions have been scattered for the past 90 days, causing the Zacks Consensus Estimate to dart back and forth. Forecasts for 2011 are now averaging $3.73, which is much lower than the $4.07 from 2 months ago and the $4.06 the company earned last year.

The company is expected to report quarterly results on Nov 2, ahead of the bell. So, keep that in mind if you decide to make a play. There is plenty of short interest already and the open interest in the put options is decent across several strike prices and expiration dates.

Emulex Corp (ELX) is sporting a Zacks #4 Rank (Sell) thanks to plenty of downward estimate revisions over the past month. The data storage equipment company is hardly deserving of a 25%, or so, gain since the summer.

In the last earnings release, on Oct 21, the company posted an EPS of 2 cents, 3 cents shy of expectations. Analysts hated the earnings news and subsequent comments, and could not lower their estimates fast enough.

Forecasts for this fiscal year are down 50 cents, to just 5 cents in the past 3 months. Next year's estimates are coming in at 25 cents, down from 72 cents. Last year the company earned 44 cents, painting a grim growth, or lack thereof, outlook for the next couple years.

I am surprised the chart does not look more like DIN's after that earnings release. But ELX looks poised for a downturn and if that happens, anyone who bought in the past 2 months will probably be selling.

Calumet Specialty Products (CLMT) just missed expectations, yet this Zacks #4 Rank (Sell) keeps climbing. Any hint of weakness out there and that should change real quick.

After falling a dime short of the consensus on Oct 13, reporting EPS of 20 cents, analysts began slashing their outlook. The Zacks Consensus Estimate for this year plunged from $1.15 to $0.25. Next year's estimates were cut in half, to 70 cents. Last year Calumet earned $1.87, not much of a growth story.

So what has the stock done? Keeps climbing. I am a proponent of not fighting the market, it's a losing battle, but once this baby gets a hint of weakness it should be a freefall. Just look what happened about 6 months ago. Some of that can be chalked up to the Flash Crash, but it also coincided with a rough earnings release.

We are All Guilty

Everyone has let emotion get the best of them at some point. But it is most prevalent in the stock market. We all succumb to it, so you might as well profit on it. When others book their gains, that's when you make your move. 

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CALUMET SPECLTY (CLMT): Free Stock Analysis Report
 
DINEEQUITY INC (DIN): Free Stock Analysis Report
 
EMULEX CORP (ELX): Free Stock Analysis Report
 
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