They Zigged, Time to Zag: AGNC, TNAV, and STEC

Call me contrarian, but while everyone else is freaking out today and selling everything in sight, I've got an itch to go shopping (be greedy when they're fearful, and be fearful when they're greedy). The three small caps I'd be targeting first are American Capital Agency Corp. (NASDAQ: AGNC), TeleNav, Inc. (NASDAQ: TNAV), and STEC, Inc. (NASDAQ: STEC). Take a look at these charts and you'll see why.

Yeah, I get that the outlook STEC, Inc. posted as part of last quarter's results wasn't a positive one even though the top line was huge for the most recent accounting period. A 40% plunger though? It's not like STEC was exactly starting out with an excessively high valuation or price either - this small cap stock has been quite mediocre all year.

I also find it a little interesting that STEC basically made it all the way back to 2010's (where it landed hard and bounced four times) right around $10.00. And, if I'm doing the math right, annualizing the expected EPS for the current quarter (let's call it $0.09 x 4 = $0.36), we're still getting a P/E ratio of about 28.0. That's not great, but it's also just one quarter - STEC, Inc. has normally been producing in the $0.30-ish area, and we many not yet want to assume this is the new norm.

Speaking of looming reversals, the big dip from American Capital Agency Corp. was probably the shortest-lived plunge among all small caps today. After AGNC fell from $28.33 to a low of $22.03 this morning (-22.2%), it's already clawed its way back to $27.35, and is only on the hole by about 3.6%.

The chart of AGNC is visually more dramatic than the numbers, and more important, confirms that other traders are thinking along the same lines. Whoever was dumping it this morning found a whole lot of buyers waiting to step in - I have to wonder how many more buyers will also decide this wash-n-rinse day from American Capital Agency is also a proverbial 'reset' button for bullishness.

Finally, another "the punishment doesn't fit the crime" scenario from the world of small caps - TeleNav, Inc. This stock is down 36% this morning after the company - despite a solid Q2 - warned that the current accounting period (Q3) would be less fruitful. The profit expectation is now around $0.19 per share, whereas TNAV had been generating something in the $0.21-ish area.

And that merits a 36% haircut for TNAV? That's a matter of perspective, but from my perspective, no. Let's just assume that the third quarter outlook is the new norm.... that still translates into a P/E of 14.5 for TeleNav, and that's assuming the following three quarters will be just as tepid as the next one. Give a little credit here.

It's pretty clear - when you take a step back - that the assumptions driving these big plunges from small cap stocks TNAV, AGNC, and STEC are bigger than just the current quarter. These are bets that the weak outlook is actually an omen of an entry into another recession. I acknowledge the weakness, but I also think it's temporary. When the next recession comes, it won't be so obvious, and the majority of the trading crowd will be in denial about it like we saw in 2008. It's never this easy.