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Why 15% Drops Aren’t Always a Sign to Sell Stocks

These examples show how strongly stocks can bounce back after 15% dips

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Changing Business Model

Angies List 185Angie’s List (ANGI) is a consumer-review site where members rate businesses they’ve used, providing other members with valuable insights should they have a similar need. Its business has mushroomed since going public in November 2011. With something like 720 categories, it has grown well beyond its original handyman specialty.

ANGI is transitioning from a business model dependent on membership fees to one driven by service provider ads and e-commerce transactions it helps facilitate for those same service providers. A recent experiment in New York, Chicago and other large cities provided a 75% cut on membership fees for new members in those cities. InvestorPlace’s Tom Taulli says investors don’t like the proposed changes to its business model as they promptly knocked its stock for a 15%, single-day loss this past October.

The reality, as Tom points out, is that its fees have to drop because others like Yelp (YELP) are already providing reviews for free. Personally, I’ve always been skeptical of membership fees driving a consumer-focused business. This move (they’ve since stopped the experiment) should be positive in the long run, but investors viewed it the other way around, which spells opportunity.

Since going public, ANGI stock has experienced five monthly declines of 15% or more, and the average of those five declines is 25%. Once again, imagine that you bought 100 shares at the end of each of these months. Your cost would be $7,261 and your current market value $561 lower at $6,700. That’s not as bad as it sounds. One of the purchases was made in July 2013 at $22.02 per share, not too far from its all-time high. Assuming that its stock price got back to $22 by the end of 2015, your annualized return would be 13.6%. That’s pretty good in the real world.

Bottom Line: Carrying out this type of plan takes loads of commitment — it isn’t for the weak-kneed. However, if you can stick to a plan (and that’s a big if), buying on big price adjustments will produce above-average returns.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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