A Lesson In Setting Low Limit Buy Prices (Thank You High-Frequency Algorithmic Traders) NYSE:GLW

In mid-2012, I began to look hard to Corning Incorporated (NYSE:GLW). The stock was undervalued because of decreased earnings from flat-screen makers. Cash flow was good and management had been doing a great job strengthening the margins. I wanted in, but the stock was trading around $13/share, and I was only willing to get into the company at a conservative price because of its dependence on glass.

I set a limit buy order at $10.79 just in case the stock sank that low, though I was far from sure that it would. I pretty much left it alone for 3 months.

And then Knight Capital Group came along. Knight Capital’s modus operandi was to utilize high-frequency algorithmic trades to make tiny profits on many trades. On August 1st, 2012 an unknown glitch caused their algorithm to go haywire. This triggered a dumping mechanism whereby Knight Capital had an instant fire-sale. One of Knight Capital’s holdings was Corning. My buy order triggered at the very bottom of the sell-off.

Since that fateful day. My GLW holding is up over 30%.

Corning Purchase

Amazingly, a second sell-off occurred in the fall due to a layoff announcement which was overblown. I could have bought in again, but was fearful of throwing good money after bad. Ultimately, the stock rebounded nicely.

I continue to appreciate Corning’s potential. The company maintains strong margins and is working to diversify its revenue streams away from touch-screen glass.Corning continues to innovate new solutions for its clients, large cap companies such as Apple and Google. Corning’s recently announced Willow Glass is going to change the game for mobile electronics yet again.

Cash Flow Financing

I was a bit concerned about the issuance for new debt, but it turns out Corning has done the same thing Apple did. They have been utilizing low-interest rates to finance share buybacks and pay dividends. It is worth noting that Corning has generated positive net cash flows for four years running.

The lesson I learned is stick to your price no matter what the markets do. If there is one thing I can be certain of from my experience as a programmer, it is this: we have not seen the last of algorithmic trading glitches.

Bear Case

  • Company is overly focused on glass screen for revenues
  • Underfunded pension and relationship with unions
  • High R&D Costs
  • Operating cash flow is shrinking

Bull Case

  • Management is controlling costs and maintaining net margins around 20%
  • Progressive dividend policy tied with stock repurchases for the past two years
  • Cash flow supports increased dividends and repurchases

I am confident management will do everything in its power to enhance shareholder value. Wendell Weeks, the Chairman and CEO himself owns approximately $10M worth of common stock and has historically sold shares between the $16-20/share range. GLW is currently around $14.40.


Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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