From the Motley Fool:
What drives the price movements of a company’s common stock? In the short term, a stock’s price can be lifted by more things than you can shake a stick at. Economic data, a press release, even a stray posting on a Yahoo! discussion board can “move” a stock … Today, I want to take a brief look at a few of the things that make a stock “go up”…
Sex
As the old marketing saw goes, “Sex sells,” and it’s as true for stocks as it is for toothpaste. Some stocks are just downright sexy, no two ways about it … Take backscatter X-ray maker American Science & Engineering (Nasdaq: ASEI)… The company’s technology is the closest thing you’ll find to a real, live secret agent gadget. Take the appeal of James Bond, combine it with … eternal fascination for everything sci-fi, and you’ve got yourself one sexy stock, practically guaranteed to go up. Is it attractively priced? Who cares? Up goes the stock! Until it goes down…
Lies
Some companies seem to have the magic touch … Wall Street analysts rave. These stocks seem bulletproof. Except for one thing: It’s all a lie … Companies with names like WorldCom, Adelphia, HealthSouth, and Enron. There’s a reason the good Lord put these stocks on the market, Fools: to remind us that if something sounds too good to be true, it probably is.
And the lying liars who tell them
And then there are the hype jobs … We’re talking about the twin yo-yos of satellite radio: Sirius and XM Satellite Radio. They’re racing to see who can burn all their cash first. Or look at the latest poster child for unrealistic expectations: Gaiam (Nasdaq: GAIA). A 117 P/E? Puh-leeze. Is this Wall Street, or did we make a wrong turn and end up on the Vegas strip?…
Why stocks should go up
One thing that all of the above scenarios have in common is this: The stocks that go up are popular … Now, how many of you have heard of a little business called Shuffle Master (Nasdaq: SHFL)? … The company supplies gaming equipment to casinos … It was also Tom Gardner’s recommendation for Motley Fool Stock Advisor way back in the May 2004 issue. Practically no one on Wall Street knew it existed then. Now that its shares have moved up 30%, eight analysts have opinions on Shuffle Master. But that’s still less than the 29 analysts each who are following Sirius and XM.
You really have to wonder: Why all the interest in a couple of stocks that have performed so poorly? And why is there less interest in Shuffle Master, which has done better? It’s quite simple, really. You’d have to think long and hard to come up with a name duller than “Shuffle Master.”
While there’s some truth to this piece, let us offer a contrarian view:
The implied argument here is that stocks that aren’t aggressively marketed to consumers and/or to Wall Street — such as Shuffle Master — are undervalued. The folks behind investment newsletters make their money off this premise — convincing their subscribers that they can help them find the “hidden gems” that haven’t been picked over by the Wall Street crowd.
Many stock market pros believe the Motley Fool pitch itself is hype, and that there is really no such thing as “beating the market” — that, in fact, all stocks are valued based on the current information available to the public. This is called efficient market theory.
Whether or not you believe in an efficient market, there’s no question that successful branding has real value. That’s what we don’t like about this article — that it seems to equate branding with false hype, when branding actually creates real value. Ask Phil Knight if Nike would be better off today if it had remained a “hidden gem” in its 1980s sneaker race with Adidas and Puma, for example.
Investing in a company that has yet to brand itself effectively is no more or less risky than investing in a company that goes skimpy on R&D. There’s no way of knowing whether the company can brand itself well, or develop new products, until it actually does so. When a company like Nike takes off in the stock market, the first thing the investor newsletters do is write about other athletic shoe companies and advise their subscribers to invest in these “undervalued” competitors. What the newsletter writers don’t understand is that these competitors are not “undervalued;” they actually have less value.
If we were investors in Shuffle Master (and we’re not), we’d actually be pretty ticked off after reading this article. We’d begin an agency review immediately to determine how we could increase the value of our brand — and our company. We think casinos are a pretty sexy business, frankly.
