Real Life Case Study in Company Specific Risk

Last week I removed the first company from my "watch list". Barnes Group reduced it's revenue guidance to the point where they no longer met my payout ratio criteria. Fortunately, they did not meet my price point prior to this announcement, so I did not own any Barnes shares. However, this does highlight additional risks that must be considered and reinforces the need to do the following:

• Constantly review the latest stock data to ensure a given stock continues to fit your purchase criteria.
• Be wary of stocks that suffer a drastic price drop. Be sure and check out all the latest news before buying in.
• Be careful about placing buy orders that will trigger automatically based on specific purchase prices. Your order will still execute after bad news has been announced.
• Understand that a similar event will eventually occur after you've' made a purchase and allow for that in your trading strategy.

If/when this last event occurs, there are at least three paths you can follow:

1. Stop-loss - Take your lumps and get out quickly. Personally, I hesitate to do this unless the news is truly devastating. But if that's the case, then the price will already be past a reasonable stop-loss price point anyway.
2. Hold - The stock is on the list for a good reason. It's assumed to be a sound company that can bounce back from bad news. So it would make sense to hold it for the long term. Logically, this is the course I would hope to follow in most cases.
3. Double-down - If indeed you believe in the fundamentals of the stock, why not buy more after the price drops? This is my Achilles Heel as it is too often my first instinct. However, I hope I can fight this and avoid "throwing good money after bad."

So this begs the question of what I would have done in the case of Barnes if I already owned it? I am marginally tempted to buy in now at the lower price point (and higher dividend yield), but I would hold I would avoid the temptation to double down. Despite the reduced revenue, they appear capable of maintaining the current dividend rate. So I would see little reason to sell immediately and I imagine I would hold this for the long run.