Dark Horse Traders' Hedge: Song Sung Blue

Song sung blue
Everybody knows one
Song sung blue
Every garden grows one

Me and you are subject to the blues now and then
But when you take the blues and make a song
You sing them out again
Sing 'em out again

Song sung blue
Weeping like a willow
Song sung blue
Sleeping on my pillow...

Song Sung Blue--Neil Diamond

When should I sell a stock?  This is a very difficult question to answer.  Like Neil says, you can always take an announcement “sing it with a cry in your voice” and have a “song sung blue.”  In the case of Arrow Electronics earnings announcement today “you simply got no choice.”

Arrow Electronics, Inc. (ARW), was originally recommended for long exposure on November 4, 2010 at $30.55, and that recommendation was reiterated on February 4, 2011.  I am of the opinion that it is time to close the position in ARW with a 39.54% profit “and before you know it start to feeling good.” The key phrase that turns this earnings announcement blue is the guidance, which has me “weeping like a willow.” The mean estimate from analysts for the first quarter 2012 is $1.07, and the company guided to a range of $1.01 to $1.13 after beating the fourth quarter estimate with $1.38 vs. $1.30.  Further, analysts have revised the 5-year growth rate down to 7.4%, and at today’s closing price of $42.63, ARW costs investors a forward P/E of 8.88.  I prefer to have the ratio of growth to projected P/E much more in our favor, so my recommendation is to close ARW at the open Thursday.

So what stock to replace ARW with?  AGCO Corporation (AGCO) has all the makings of a stock ripe for long exposure.  AGCO is the third largest farm equipment maker in the world and has reported better-than-expected earnings results in the last four quarters.  Analysts are expecting the company to report $1.33 on February 7, 2012, and it is trading at a forward P/E of 10.35.  Granted, this forward P/E is higher than ARW’s, but we are getting a 1-year expected earnings growth rate of 87.9% and a 5-year expected earnings growth rate of 18.6%. This provides us with the ratio that allows us to “take the blues and make a song, and sing them out again.” AGCO is the #9 ranked stock in the Sabrient Baker’s Dozen 2012, which have collectively gained over 15% in the first month of trading.


Sell Arrow Electronics (ARW) at the market, Thursday February 2, 2012

Buy AGCO Corporation (AGCO) at the market, Thursday February 2, 2012

Disclaimer: Dark Horse Traders’ Hedge is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Dark Horse Traders' Hedge
sbrown / Tag: AGCO, ARW /