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When Market Noise Breeds Opportunity

When Market Noise Breeds Opportunity by Joe Weidenburner, Aeternitas Investing

Much of the day to day market action is noise. Graham’s Mr. Market is an anxious fellow who frequently offers market quotations in strong businesses that are disconnected from the true per share business value of the enterprises. Long-term investors are best served by avoiding each day’s tick by tick action and instead focusing on the economics and structural advantages of the companies they own or follow.

Sometimes, however, the daily noise in the market provides opportunity to purchase initial or increased stakes in best of breed businesses. I find that volatile market action, particularly after long runs in market price, provides the patient investor with opportunity. We are seeing such opportunity in two of our favorite holdings.

Outerwall is a company I’ve covered in some depth in our second quarter management commentary, as well as its own dedicated post. The stock is down around 8% over the past week and almost 21% over the past month. The company reported earnings on July 30. The company beat on the bottom line ex items, but missed expectations for revenue in the quarter, and showed a modest decline in revenue year over year. The ex-items portion pertains to a goodwill impairment charge on the company’s ecoATM division which is failing to meet revenue and profitability standards. Wall Street was not impressed by the company’s full year guidance.

Those are the headline numbers and were not very well received. The stock fell over 13% the day following the report and has continued to show weakness. We think this is an opportunity to add to our position, and while we have not done so yet, we are considering it strongly...