Garmin Teaches a Hard Lesson

Until yesterday, the big winner for my current portfolio had been GRMN. In mid October, I moved into GRMN with an intial purchase at $49.15. After a week, it had climbed to $53, so I took another position. A week later, I doubled up again. As month-end approached, GRMN was at nearly $58, and I was sitting on $4000 in profit. Then came earnings season.

Lesson number one: Assume the worst with earnings announcements. In the case of GRMN, I tightened up my stop-loss the day before, even though there was not even a whisper of bad news. Just the opposite, in fact; GRMN sales of their popular Tom-Tom portable GPS were breaking retail records. But, you never know for sure. Certainly, the folks at GRMN were not leaking anything. The quarterly number missed the analysts' expectations on sales. Profits were fine, and so was growth. But not sales, which missed by a few million. At the open, GRMN was down $6, and it finished the day down more than $8. What a wipe-out!

Of course, GRMN's business is just fine. It will break every company record this year, and its GPS devices will be popular at Christmas. But they missed the estimate. And anyone who was into the stock late, as I was, got crushed. Except that I didn't. My initial $.50 trailing stop-loss for the first half of my position was triggered on Friday at $53.28, but Monday's close was $53.09. My second $.50 cent stop loss was triggered at market open Tuesday (right after the earnings announcement) and was filled way down at $46.54, letting me get out just below break-even. GRMN closed the day at $44.95. Without stop loss orders, I would have lost more than $10,000 from my position at the top. But, as it was, I only lost $825 from my position.

Lesson Number Two: Use stop loss orders to protect yourself during earnings season. I had learned this lesson in 2005 on two other stocks, Chico's and Palomar Medical Technology. Always assume the worst possible news on the eve of an earnings announcement and have your stops up tight against the stock price. If you're wrong, you can always buy back in. But the market is ruthless on stocks with bad earnings announcements, even if the business is "good".