I had written an article arguing we were now in an acceleration of the boom phase, and I am beginning to doubt my own investment thesis. I had been expecting analyst upgrades, based on the 250 basis point increase in the gross margins that 3D systems was generating. These have manifest, at both Canaccord and Janney Capital.
However, 3D Systems was recently downgraded by William Blair’s analyst Brian Drabb. Mr. Drabb had appeared very anxious about organic growth on the previous conference call, and it seems the CEO’s answers were unable to satisfy his concerns. This event is important because it indicates a possible shift in perception.
One analyst downgrading is not indicative of a whole market shift, but it does show a weakness in the bull thesis. What I am questioning now is whether we are really in a twilight phase – where both investors and analysts don’t truly believe in the underlying thesis anymore, but they continue to play the game. If this is true, we could be in for a catastrophic downward acceleration soon.
An addition weakness in the thesis comes in the form of a technical sign of a reversal. There was a doji on May 14, a downward hammer on May 15, and a down-day to confirm the hammer signal on May 16. This is a pretty strong reversal sign.
The stock is still quite popular with retail investors, who don’t seem to be doubting the thesis. But a second downgrade could mark the beginning of a sudden catastrophic downward acceleration (Stages 7 and 8 of the reflexive cycle, as outlined in my article), which increases the risk/reward ratio enough to make my position dangerous.
I hate to change my position so soon after arguing for a continuation of the boom phase, but if my investment thesis has been weakened, I have no business staying long the stock. Thus I have closed my position.