Buca di Beppo

Molto indigestion

Buca home page

Company. Buca di Beppo is a chain of Italian restaurants "where our guests feast on family platters of real, immigrant, Southern Italian specialties in a boisterous, celebratory environment that recalls the Italian-American supper clubs of the 1940s and '50s." (company website) "Italian dinners and SANITARY BATHROOMS" seems to say it all.

Babelfish translates buca di beppo as "hole of beppo." This morning that seems apt, as in "black hole of beppo." Buca di Beppo's website gives a slightly different interpretation: "'Buca' means basement. 'Beppo' is Southern Italian slang for 'Giuseppe,' or Joe."

BUCA stock chart

When I bought BUCA there was ample reason for optimism. The stock had broken out of a relatively narrow range between $5.50 and $6.40, and then stabilized just above $6.50. After it advanced again smartly on 27-Aug, I bought the next day.

And for nearly three weeks BUCA has looked like a winner: climb to $7.38, then consolidate just above $7.

This morning, before the crack of dawn, Buca issued a press release lowering their guidance for Q3 results, to be reported 24-Oct. Instead of the 4¢ a share profit the analysts expected, Buca expects to report a loss of 10-12¢. Before the market even opened USB Piper Jaffray and Merriman Cuhan Ford both lowered their ratings to "underperform" and "sell" respectively.

The bids lined up in the queue, waiting for the market to open, were for prices near $5, a drop of about 27%. All of this before a single trade had been made.

What to do? A 27% drop clearly violates my 8% rule! Should I sell, take my losses and lick my wounds? Or, should take a big dose of Pepto-Bismol® and hang on?

I am mindful of my experience with Petro Kazakhstan (nee Hurricane Hydrocarbons) which I sold at a big loss only to see it recover. I faced a similar dilemma with Compuware (CPWR) in July when it pre-announced that it would miss expectations and the stock plunged. I held on to Compuware, and today it is back up to a bit better than break-even.

There is always the idea to take the loss and jump back in if the price starts to rise again. But that presents two problems. First, if I jump back in within 30 days, that creates a "wash sale" for tax purposes, which complicates bookkeeping and tax preparation. Second, the stock would have to rise 37% to make up for a 27% loss. I know it doesn't sound right, but do the math: This morning's price of $5.05 is 27% less than yesterday's close of $6.92. Going the other direction, $6.92 is 137% of 5.05. Add in the trading costs, and this becomes a very unattractive proposition.

I'm going to hold. In the time it has taken to write this note, BUCA is back up to $5.42, which tells me the panic selling is probably over, and cooler calculations are starting to prevail. At the very least, waiting may reduce the amount of loss I have to eat. Mangia, mangia!