Emotions are running high when it comes to Equifax Inc (NYSE: EFX) stock.
People are furious that the credit monitoring company allowed itself to be breached by hackers in May, exposing the personal information of as many as 143 million Americans.
And they are livid that the company learned of the breach in late July but didn’t tell the public until Sept. 7. It was also disclosed that in early August, three executives sold $1.8 million in Equifax stock, cashing out before the stock started its deep drop (Equifax says the executives had no knowledge of the intrusion). The theft was traced to a software flaw that could easily have been fixed.
[See: 7 Investment Fees You Might Not Realize You’re Paying.]
Now it’s a panicky free-for-all — on a normal day, fewer than 700,000 shares of Equifax stock change hands in the New York Stock Exchange. But Thursday saw investors dumping more than 34.5 million shares as the U.S. Federal Trade Commission announced it opened an investigation into the breach. EFX stock has fallen 35.5 percent since the breach was announced.
In a new research note, Morgan Stanley analyst Toni Kaplan projects that EFX stock — valued in early July at $145.44. — could drop to as little as $50.
“We believe that the bear case … is that consumers question why they should be paying EFX for credit monitoring services following a loss of trust as well as the fact that they did not detect their own data breach for some time after it occurred,” Kaplan writes in the note. “This could result in the [direct-to-consumer] business being completely impaired.”
Kaplan also raises the possibility that the credit-reporting industry will see increased regulation from Congress and that Equifax could face larger-than-anticipated fines — both which would hurt its profitability.
Should investors catch a falling knife? When a company is in crisis and the stock collapses, some investors look to buy in at the lower price in hopes that the company will make a quick turnaround. In the investing community, that’s called “catching a falling knife.” It’s a risky thing to do.
In February 2015, Lumber Liquidators Holdings ( LL) stock fell more than 26 percent when the company announced a big quarterly earnings miss and disclosed that an upcoming “60 Minutes” report would paint the company in a negative light. The report, aired in early March, showed that the company’s laminate flooring may contain high levels of formaldehyde, a cancer-causing chemical.
Even though the company denied wrongdoing, the stock remained irreparably harmed when later that year the company pleaded guilty in federal court to environmental crimes related to the illegal importation of hardwood flooring and paid fines of $13.13 million. The matter was separate from the “60 Minutes” investigation, but the LL stock failed to recover.
[See: 10 Stocks Paying Dividends for More than a Century.]
In a possibly more well-known case. Mexican fast-food restaurant Chipotle Mexican Grill ( CMG) once traded at nearly $750 per share, but a catostrophic series of events in 2015 — outbreaks of E. coli, norovirus and samonella — at numerous stores sent both customers and investors fleeing. The outbreaks forced state health departments and the Centers for Disease Control and Prevention to get involved, and Chipotle closed all its stores for a few hours in February 2016 to focus on food safety.
But just as the stock seemed it was swinging higher another outbreak in Sterling, Virginia, in July 2017 sent CMG stock back down 10 percent in a day. CMG stock now trades at $313, and with a price-earnings ratio of 67, it remains overvalued even at its diminished price.
The case for Equifax stock. So, all that said, you’d be crazy to take a new position in Equifax now, right? Not necessarily.
Valued at $145.44 in July, Equifax stock opens today at $92.98. Its P/E of 19.7 is less than the P/E of the Standard & Poor’s 500 index, and much better than the P/E of competitor TransUnion ( TRU, 35.8). So unlike Chipotle, EFX stock today is decently valued.
And there is plenty of upside. Even though Morgan Stanley projects that Equifax could drop to as low as $50, it still projects a price target for EFX stock at $127. That’s a 30 percent upside for investors who take a position in the wounded company now.
There’s no doubt that Equifax is a loser stock for anyone who is trying to time the market and make a quick buck. But if you are a long-term, buy-and-hold investor, staking a new position in EFX here isn’t a bad play. Just be sure to use only a small portion of your portfolio — no more than 5 percent — on such risky trades.
Work your way in slowly. Nobody knows how far Equifax will fall and how quickly it will bounce back. If you are taking $5,000 to invest in Equifax stock, it would be painful to buy at $93 just to see it slide into the $60s or $70s in the coming weeks. And it would be equally painful to delay your purchase and then see the stock rally without you.
So the best solution is to work your way in slowly. Divide your investing cash into four piles and invest 25 percent of your Equifax stock now, then 25 percent a month from now. Increase your position incrementally over the next two months until your $5,000 is fully invested. This strategy guarantees you won’t buy at the top or the bottom, but you are hedging your bet against future losses.
[See: 7 ETFs You Have No Business Buying.]
And finally, don’t panic if EFX stock continues to fall. Since you are only using a small part of your portfolio on this trade you won’t be mortally wounded should this “falling knife” draw blood. But if Equifax works its way back to its previous valuation in the next two to five years, you’ll have a nifty profit to show for your gamble.
Disclosure: The author does not hold a position in the aforementioned securities, but is planning on taking a long-term position in EFX in the next 30 days.
More from U.S. News
8 Ways to Satisfy a Craving for Restaurant Stocks
Oil ETFs: 8 Ways to Invest in Black Gold
Avoid These 8 Rookie Investing Mistakes
There are Good Reasons to Buy Equifax Inc (EFX) Stock Now originally appeared on usnews.com
