Foolishness of the Many ... Opportunity for the Few
Stock Market Analysis Video
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Last weekend I visited the Brimfield Antique Fair in Massachusetts to scour the seemingly endless booths for goodies to take home. I only ended up purchasing two picture frames, but I had a lot of fun browsing.
I didn’t see anything directly related to stocks or investments, but Brimfield did make me think a lot about perceived value. Many of the vendors are selling actual antiques, while others are hawking vintage items and still others are selling just plain junk. And sometimes it’s difficult to tell the difference.
I love going to Brimfield but I never really buy that much because the prices are often too steep for my budget. The vendors at Brimfield also really know their stuff, so you’re unlikely to score any real deals (unlike at a garage or estate sale). And even if I really like something, I want to check against values online to make sure it’s really worth what the seller wants for it (and that’s challenging when you’re standing in a field with no data service).
So how does this relate to investing?
Well, just like antiques or vintage wares, stocks are selling for their perceived value. Investors are always looking ahead—in fact, investors’ perceptions of the company’s prospects can be as important as the reality.
It's changes in perceptions that make stocks move. It's not earnings announcements by themselves, and it's not news about new products or new markets. It's changing perceptions. And these perceptions are all reflected—to those investors who can interpret them—in the stock’s charts.
Which brings me to LinkedIn’s initial public offering (IPO) this week …
Investors have been anticipating the IPOs of many major social media companies for a couple of years now and finally got their first taste of how the industry will fare on the open market with the debut of LinkedIn (LNKD) on Thursday.
The company originally priced its IPO at $32-$35 per share, but raised that to $42-$45 on Tuesday because of growing demand for the stock. It ended up selling 7.84 million shares on Wednesday night at $45 each. That put LinkedIn’s valuation around $4 billion (the previous price had it around $3.3 billion).
Not only did the IPO price much higher than expected, but the stock shot up 110% in its first day of trading on Thursday to close at 94! That effectively doubled the company’s valuation in one day, bringing it to around $9 billion.
LinkedIn isn’t as big a name as social media behemoth Facebook, but the professional networking site does boast 102 million users (to Facebook’s 500 million). LinkedIn, which was founded eight years ago, only made $15.4 million last year.
So why did investors value it so highly? Because of its perceived value in the marketplace and future potential to become as big or even bigger than Faceook, but in the career-building space.
LinkedIn does have three revenue streams: online advertising, premium subscriptions and charging business for recruiting tools that should help build the company’s bottom line in the future. But will they be enough? It’s too soon to tell and you’re best off watching the chart to see how it trades in the coming weeks and months.
How LinkedIn performs in the stock market could be an early indication of how other social media companies, like Groupon and Twitter, will do when they come public. And many analysts saw LinkedIn’s debut as a very bullish sign.
LinkedIn's story is a good one and it certainly wowed investors this week, but at Cabot, we generally do not advise buying stocks that have just had their debut. We like to see stocks get a little trading history behind them before jumping on board and with LinkedIn's numbers still lacking, we'll need to see some improvement in that area as well. This is definitely one to watch and possibly revisit once it gets a little more mature.
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Now for this week’s button …Foolishness of the Many ... Opportunity for the Few
When the crowd is most foolish, at market tops and bottoms, are when the biggest opportunities are presented for independent-minded investors. In late 2008, for example, as General Motors was going bankrupt, you could have bought Ford stock for a dollar and change. At the other end of the scale, back at the top of Internet mania in 2000, you could have sold Yahoo for 125. So keep an eye on the sentiment of the crowd. In Dickson G. Watts' little book, Speculation as a Fine Art and Thoughts on Life, we find the quote, “The foolishness of the many is the opportunity of the few.”
In this week’s Stock Market Analysis Video, Cabot China & Emerging Markets Editor Paul Goodwin says the U.S. markets have had an OK week, but things are a little bit rocky. Despite the market’s volatility, we still believe the long-term trend is up. Stocks discussed: MetroPCS Communications (PCS), Fossil (FOSL), Baidu (BIDU) and Crocs (CROX). Click here watch the video.
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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 5/16/11 – Two Weddings and Two Funerals
On Monday, Cabot Publisher Timothy Lutts recounted his recent travels through Europe and his wonderful experience at a wedding of a family friend in Ukraine. (Note: Readers really enjoyed this issue, so definitely check it out!). Tim featured a stock that was recently recommended in Cabot Top Ten Trader. Featured stock: Weight Watchers (WTW).
Cabot Wealth Advisory 5/17/11 – Pop Goes the Silver Bubble
On Tuesday, Chloe Lutts, editor of the Dick Davis Digests, discussed the recent popping of the silver bubble and how the real story behind the collapse is one of prices and buyers, despite any of catalysts that may have contributed. Chloe also discussed post-bubble investing. Featured investment: Senior Housing Properties Trust (SNH).
Cabot Wealth Advisory 5/19/11 – What’s Your Investing Personality?
On Thursday, Cabot China & Emerging Markets Editor Paul Goodwin discussed the legacy of B.F. Skinner and how it relates to stock investing. He also defined two investing personality extremes: the Conservative Investor and the Aggressive Investor and how there’s a system out there for everyone. Paul then recommended a China-based telecom company. Featured stock: China Unicom (CHU).
Until next time,
Editor of Cabot Wealth Advisory