The people that are making these bets often have very good reason to do so. They understand the prospects of what they are buying and selling. They understand the fundamentals of the business. This understanding, can come from having a ground level perspective, just keeping your eyes open socially for trends, or in illegal cases, insider trading.
It's these bets, from people with a perceieved knowledge of the situation, that makes stocks leading indicators. This means a stock doesn't report good earnings, and then move higher, it moves higher, then reports good earnings. While it is true, you will see stocks pop the day after results, those people are late, or traders. In 99% of cases, they've missed a great run already.
This game is not that easy. You can't just see the results, make your bets on winners, and keep winning (okay well sometimes, thanks AAPL!). The results these companies report, are old, and we're making bets on the future, not the past. This is a "what have you done for me lately" market, with an extremely short memory. You have to know a key piece of information, and you have to be right about it.
In 2010, I saw Apple, and Android's products, in everyone's hands, and concluded RIMM's life was short lived. I saw the business niche Blackberry had eroding. I saw RIMM's stock topping out, going from an out-performer, to an inline stock, and eventually to an under-performer, on up, or down days. I knew RIMM was up against two very big, very tough, great tech companies (GOOG and AAPL), with more evolved ecosystems, not to mention NOK, MOTO etc.. That was enough to put RIMM on my do not buy list for 2010. RIMM got massacred that year. Six month's after my call, I must've seen 20 of my 300 Facebook friends, long time Blackberry enthusiasts, say they were switching over. Selling at any point in the last two years, was pretty much, correct.
The stock was, and still is, the perfect leading indicator. The overcorrection in RIMM is the red herring here. If RIMM's business was just slightly slowing, it's stock would've declined at a more gradual pace, especially with a back drop, of a slightly appreciating market. Even when accounting for a shrinking PE, due to slower growth, I would've expected RIMM's stock to find bases, at $40, or $50 based on it's pretty good earnings. Good stocks do that. They get hit with a decline that wasn't warranted, or was just profit taking, therefore become attractive, and become good buys.
|Photo By N. A|
If you had just paid attention to the conference call, and watched the earnings reports, you might have never even seen this decline coming. People are still scooping up RIMM, for what they feel is "on the cheap". Right now, it appears RIMM will bring in at least $4 a share this year. If that's true at $15, the PE is only 3.5. That seems very cheap right?
I trust my gut, and the stock action, way before the earnings predictions. The stock is screaming, very loudly, EPS is going to shrink, and fast. It's way more likely now that RIMM will only earn $2, or possibly, god forbid, post a loss in 2013. Otherwise, why would the stock plummet so far?
The people who rode RIMM down, weren't listening to all the signs I've been teaching you. I do feel sorry for them however. They missed every signal, saying sell. They missed increased competition. They missed the stock action giving them many technical points to sell. They missed the change that was going on the ground, where Apple, and Android, just had better products, and ecosystems. They forgot that RIMM was trading as a high growth tech stock, a 35 PE, and couldn't afford to have slowing growth, in this booming sector. They forgot RIMM had all there eggs in literally one basket, and wasn't really innovating new products. They forgot RIMM lost its title as the "only phone for business use".
Looking back, it's obvious. However, the past doesn't make you money. As I sat there Dec 31st, 2009, that was the time to really be right. Like we talked about in "What Goes Up, Doesn't Need To Come Down", sometimes you have to go against the grain. Your not going to have all the reasons these people were wrong, laid out for you in a nice post on "The Dice". What you will have, is the stock action itself, and the ground level evaluations, both leading indicators. If the stock action, and the fundamentals seem to be aligning, it might be time to make the buy. If overall, the stock action is going against your perceived fundamentals, that should send off alarm bells. You need to be damn sure those earnings are there, and growing at their perceived rate. Most of the time, you'll just be plain wrong.