Knife Catching for Traders... Toyota's Stock (TM)

How bad do things get for major brands suddenly under fire?  If you have followed the brand damage assault against Toyota Motor Corp. (NYSE: TM), you know it gets bad for a brand and very bad for shareholders.   Imagine if the recalls upon recalls that have continued morphing had started as the beginning of January rather than at the end of January.  That -8% comparable sales for January would have been far worse.

We still have three weeks before the February sales data is out, and the only thing that might keep the year -over-year sales figures from looking suicidal in February is that a year ago was perhaps the peak of the economic misery when consumers were getting worried about having to live in a barter economy.  Yet it seems that some traders and investors have started trying to make the bet that the worst has been seen for the stock.

Toyota’s ADR has only closed up in 2 of the last 12 trading sessions.  Anyone playing in the stock now is participating in the game of what traders call ‘catching the falling knife.’  Still, the game is being played.  The reason we are addressing this is that despite the news flow getting worse, the selling climax seen last week when the stock fell almost $5.00 in one day on more than 18 million shares.  That was February 3 and the stock closed at $73.49.  Shares hit as low as $71.00 the following day on 10.9 million shares and it closed at $71.78 on Thursday.

Friday had lighter volume and fewer shares managed to come back up by more than $3.00 from the lows with a close of $74.71.  On January 19, 2010, Toyota was a $91 stock.

Where this gets interesting is that Toyota shares are down under where they were at the start of October 2008 when the chart went off a cliff.  At the extremes after that nose-dive we did see sub-$60 share prices during October and November and in December of 2008.  Then a brief rally came before the stock touched those same sub-$60 lows during the March 2009 selling climax.  During each of those rallies before the huge recovery came the resistance level was right around $70 per share.

When you see huge share price drops, particularly in some of your largest and perhaps most favorite companies of the past, the damage is almost always real.  It is often that companies have far worse underlying issues that shareholders were every made aware of.  But go ask a trader to look at a highly volatile stock and they will tell you where they will start trying to make a stand.

Recalls are awful.  The brand damage can last far more than just a one-off event.  If you ask the public or a Toyota owner, they are probably still confused about whether they believe the floor mat issue, the sticking accelerator issue, and now the brake issue.  Or is it electronics?  You get the gist, it is still unknown.   And there are multiple recalls over multiple issues.

It is impossible to know if Toyota shares will go lower into the $60’s or not.  You have to imagine that more negative headlines will be coming.  How many major brand damage issues are ever just a short series of events that have no longer-term news associated with them?  Very few.  Right before the closing bell, shares are down about 2.2% at $73.05 on 3.3 million shares and the intra-day low today was $72.41.

This still looks too early for us to think the worst is behind the company.  And being a knife catcher is often full of more pain than fun.  But some traders are voting with their trading books that either the worst is behind it as a stock or they are at least starting to get interested in the stock.

JON C. OGG