How to Handle Sloppy Action and a Harrow-ing Trade

We have sloppy action on Thursday, as some minor early strength was sold and breadth has been deteriorating. Only 40% of stocks are in positive territory. When that happens, it typically means that small caps are lagging, which is the case with the Russell 2000 IWM down 1.2% vs. the S&P 500 down 0.5%.

I have been digging through the charts and I don't see anything that I want to add to right now. Most charts need more work, and there is substantial risk of more downside for the indexes. When considering new buys, one question I ask myself is whether I am likely to miss out on a strong trend if I don't jump in immediately. The answer to that question for everything I look at right now is no.

Harrow: A Lesson in Managing Expectations

I have previously mentioned Harrow HROW as a top pick. It was acting quite well but then sold off hard on its fourth quarter earnings report. The company missed estimates significantly, with earnings per share coming in at $0.03 against expectations of $0.22, and cut guidance. That is not a small miss. That is the kind of number that makes investors question whether they understood the story correctly.

What happened here is a good illustration of a common mistake made by management. They were too promotional. They overpromised and underdelivered, set expectations too high, and set the stage for disappointment.

Back when Apple AAPL was making its massive run during the Steve Jobs era, it was almost a joke how consistently he would low-ball guidance. Everyone knew Jobs was intentionally setting the bar too low and there would be a huge beat. Investors loved it and the stock rampaged higher for years on beat after beat.

HROW management has done the opposite. It is understandable that they are very optimistic about the company and eager to generate enthusiasm, but when a growth stock with a high multiple misses by that magnitude it kills the momentum entirely. Investors begin to wonder if they made a mistake and there is very little appetite for jumping in on the weakness.

What is most notable about HROW is that analysts still love the longer-term thesis. Four analysts immediately issued updated reports reiterating their buy ratings while adjusting price targets. Lake Street went from $70 to $60. Cantor maintained its aggressive $94 target, while reaffirming "overweight." Ladenburg went from $66 to $62. HC Wainwright actually raised its target from $69 to $70. Across the broader analyst community the average price target now sits around $70.63, representing roughly 80% upside from current levels. The consensus rating remains "strong buy."

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That kind of sustained analyst conviction after a miss of that magnitude is notable. It suggests the long-term thesis is intact even if near-term execution disappointed badly.

I am still optimistic about HROW and hope that management learned a lesson about how to manage expectations. The guidance cut was likely done precisely for that reason, to reset the bar at a level they can actually clear. But the chart is in poor shape and market conditions are difficult. I will be buying more eventually but will watch and wait for a better setup before acting.

At the time of publication, DePorre was long HROW.