What drives the price movements of a company's common stock? 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. But long term, it's valuation that matters. Today, I want to take a brief stroll through a few things that make a stock "go up." I'll close with the best reason -- the one that David & Tom Gardner focus on when choosing companies to recommend for our flagship investment newsletter: Motley Fool Stock Advisor.
But first, the fun stuff: the "sex and lies" promised in that catchy headline you see above.
As the old marketing saw goes, "Sex sells." It's as true for stocks as it is for toothpaste. Some stocks are just downright sexy, no two ways about it. It's the reason their stock prices go up and up, regardless of whether the business behind the stock -- and the numbers behind the business -- support the company's lofty share price.
Take plasma gun-maker Ionatron (Nasdaq: IOTN ) , for example. The company makes the closest thing you'll find to a real, live ray gun this side of a Star Trek rerun. Take the big-bang appeal of a gun, combine it with boys' (and men will be boys) 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!? Zap! Ouch! And up goes the stock!
Until it goes down. Though you ordinarily wouldn't think of insurance as "sexy," back in its day, American International Group (NYSE: AIG ) had all the curves. For years, it seemed the company could do no wrong -- until one not-so-fine day, a certain New York Attorney General came calling, and AIG suddenly could do no right. And that's the danger with sexy stocks. Like rock stars, they can be awfully popular for an awfully long time, but eventually, the wrinkles appear, the love handles develop, or the star gets caught lip-synching. It takes only one public goof to turn a sex symbol into an object of scorn and derision.
Some companies seem to have the magic touch. Their sales increase exponentially. Profits go through the roof. Wall Street analysts rave. These stocks seem bulletproof. Except for one thing: It's all a lie. You know which ones we're talking about: Companies that make funny money by stir-frying the bejeezus out of their books. 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 not talking about the book cookers this time. Well, not just them. We're talking about companies that might have quietly lived out their lives in penny-stock land, then just as quietly expired in solitude and anonymity. We're talking about the twin yo-yos of satellite radio: Sirius (Nasdaq: SIRI ) and XM (Nasdaq: XMSR ) . And newcomer Worldspace (Nasdaq: WRSP ) , currently giving those two a run for their money in the race to see who can burn all their cash first.
Or look at the latest poster child for unrealistic expectations: Google (Nasdaq: GOOG ) . A 102 P/E? Puh-leeze. Is this Wall Street, or did we make a wrong turn and end up on the Vegas strip? I know, I know. There's no arguing that the stock hasn't been a good investment. But, heck, a lottery ticket can be a good investment. You just can't know that until it has paid off. And "investing" in hype jobs is about as reasonable as "investing" in lottery tickets. You may get lucky -- once. (If you do, then count your blessings and hide your winnings.) But play too often, and ultimately, you'll lose everything -- down to and including the dollar you started with.
Why stocksshouldgo up
As Warren Buffett -- paraphrasing Ben Graham -- so elegantly put it: "In the short term, the market is a popularity contest; in the long term, it is a weighing machine." One thing that all of the above scenarios have in common is this: The stocks that go up are popular. Raise your hand if you haven't heard of Enron. How about MCI-WorldCon, uh, Worldcom? Thought so.
Now, how many of you have heard of a little business called Quality Systems (Nasdaq: QSII ) ? For those who haven't, here's a quick rundown. The company helps automate medical record-keeping for doctors and dentists. Exciting stuff, huh? It was also Tom Gardner's recommendation for Motley Fool Stock Advisor way back in April 2003. Practically no one on Wall Street knew it existed then. Today, next to no one does. There's a grand total of four analysts following Quality Systems. Compare that with the 27 analysts each who are following Sirius and XM.
You really have to wonder: Why all the interest in a couple of stocks that have underperformed the S&P 500 by double-digit margins all year long? And why so little interest in Quality Systems, which has more than doubled this year, beaten the S&P by a 125% margin, and provided Stock Advisor subscribers with more than a five-bagger since Tom recommended it less than three years ago?
It's quite simple, really. You'd have to think long and hard to come up with a name less unimaginative than "Quality Systems." Every HVAC contractor in the country, his brother, and his Uncle Jed claims to sell "quality systems" of some sort. It's a name lacking imagery, and totally devoid of sex appeal. Yet that very lack of excitement has helped to keep analysts from noticing that over the past five years, Quality Systems has increased its earnings an average of 35.1% per annum.
Fortunately for our members, we looked past the name, embraced the lack of hype, and focused on the numbers. Sure, sex may sell elsewhere. But at Stock Advisor, we'd rather buy performance. Since Stock Advisor opened for business in the teeth of the bear market in 2002, our members have earned 57% returns against an S&P average that's up just 14%. If that's the kind of performance you are seeking, click here to give our newsletter a try for 30 days, free of charge. If you love the service, stay. If not, cancel any time with no strings attached. You have our word on it.
This article was originally published on Dec. 15, 2004. It has been updated.