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Cats, Rats, And Stocks

Little Man The CatIf you have a sick pet right now, you don’t want to hear this. And I don’t blame you one bit. But the truth is, there’s opportunity in adversity, and this story illustrates that. The world is tough.

It’s even a little mean sometimes.

A good friend of mine has been dabbling in online stock trading. He bought a stock on Thursday, sold it Friday, and made 25% on several thousand dollars. The stock … yep … Menu Foods.

Menu Foods’ stock price dropped like a rock after they announced a major recall of cat and dog food on March 16th. The news kept going from bad to worse. And the news spread like wildfire. I have a lot of friends with pets and they were all scrambling to get answers to find out what they should do and what brands were tainted.

Not the kind of situation that makes your stock go up. But the markets over-reacted. Considerably.

Menu Foods lost half it’s value in about a week. That’s a lot. That’s a helluva lot. So my buddy jumped in and bought at $3.90. The next day he unloaded it at $4.89 and made a nice profit. A lot of traders made a nice profit on Friday.

What Brought The Stock Back Up

There are a number of factors that you have to consider when you invest in an ugly situation. Here are some of the factors that helped the stock price go back up.

  • Paul Henderson stepped up to the plate. He promised that Menu Foods would take responsibility and compensate expenses to pet owners incurred as a result of the food. On the surface, this looks like a big bundle of cash is going out the door in the future. But restoring confidence in consumers is the only way to bring a company back from the brink in a situation as bad as this.
  • Menu Foods isn’t just Menu Foods. Dozens of brands were affected because MF is a contract manufacturer. They make pet food for dozens of different brands. All these brands are going to invest a lot of time and money to get the positive word out there once the mayhem dies down.
  • There’s someone else to sue. Class action lawsuits are already being filed against MF, but the toxic chemical aminopterin (used in rat poison) appears to have originated from an ingredient supplier overseas. Depending on how big this supplier is, Menu Foods could recoup most or all the costs related to this recall and impending suits.

My buddies next stock pick? Maybe Vonage. He’s not sure yet. They just lost a court case with Verizon to the tune of a $58 million dollar cash payout plus a 5.5% monthly royalty rate. Adversity’s knocking.

The cat in the photo is Little Man. He’s well and fine.

Denouement
 

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8 Comments

  1. Hey

    I love it!!

    I don’t trade as I can’t stand the risk but this guy has exactly the same philosophy I would take..keep a close eye on the stocks that have just taken a huge hit. 9/11 was a terrible event but so many people made so much money due to people panicking…

  2. Mat,

    Yeah, It’s pretty easy to see that Menu Foods was a panic sell off and was going to bounce back some. It’ll be up and down for a while and he just got lucky with a big jump up happening the day after he bought it.

  3. Congrats to your friend on a great return. I wish I had more money and more knowledge of the stock market to invest in it..Maybe in a few years :D

  4. Gregg,

    I think he got lucky. He’s been reading up on day-trading and talking to a few people.

    I do think he has a knack for it and he likes the risk. Both of those things help. We’ll see how he does in the longer term. If he builds a track record of more wins than losses, maybe I’ll get him to put together some trading strategies that have helped him for a Zoomstart post.

  5. That sounds great. Maybe in the future you two could even work together on a website to help beginners who are interested in learning more about the stock market and investing in it..I’d definitely be interested in that, because I know absolutely nothing except for some of the basics such as “buying at par” ha

  6. [...] A couple weeks ago, my good buddy Tom made 25% overnight by betting on bad news in the stock market. It’s a great example of how there’s opportunity in adversity. [...]

  7. [...] Buying small to mid caps on bad news [...]

  8. [...] devaluations on bad [...]


 

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