The lesson in Kirkland's 'falling knife'

Shares of Nashville home goods retailer Kirkland's (Ticker: KIRK) are trading near $16 per share after falling 17 percent to nearly $10 a pop three months ago. Saj Karsan at Seeking Alpha argues smart investors should buy in to companies when shares are dropping, as Kirkland's were, to "catch the falling knife, and sell it to Mr. Market once it's no longer falling." There is a multitude of research that suggests that stocks that underperform the market tend to outperform the market in subsequent periods. Despite this, the mainstream media and analysts continually advise against buying a stock that is falling. This is terrible advice. Panic-selling can often create just the opportunity the value investor is waiting for.

Of course, this doesn't mean one should buy just any falling knife. All investments must be studied and vetted carefully. A company's current financial position and future earnings power must always be considered relative to its asking price. But "falling knives" should be welcomed as potential opportunities, and not situations to be avoided.