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 and 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 identification card-maker LaserCard (Nasdaq: LCRD ) , for example. The company's biometric verification system is the closest thing you'll find to a real, live secret agent gadget. Take the appeal of James Bond, combine it with boys' (and men will be boys) eternal fascination for everything sci-fi, and you've got yourself one sexy stock that's practically guaranteed to go up. Is it attractively priced? Who cares! Up goes the stock!
That is, until it goes down. Back in its day, Eastman Kodak (NYSE: EK ) had all the curves. For years, it seemed the company could do no wrong -- until its photo technology was no longer best-of-breed and its moat dried up. 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 what we're talking about: Companies that make funny money by stir-frying the bejesus out of their books. Companies with names like WorldCom, Adelphia, HealthSouth, and Enron.
Fools, there's a reason the good Lord put these stocks on the market: 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 they expired in solitude and anonymity. We're talking about the twin yo-yos of satellite radio: Sirius and XM, currently in a race to see who can burn all their cash first.
Or look at the latest poster child for unrealistic expectations: Baidu.com (Nasdaq: BIDU ) . A 288 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 huge opportunity in China for Internet growth. It's the next superpower economy. If this thing works out, it'll be a great investment. But heck, a lottery ticket that "works out" is a great investment, too. "Investing" in high-priced, hyped up stocks 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 stocks should go 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 Healthways (Nasdaq: HWAY ) ? For those who haven't, here's a quick rundown. The company provides health and care support programs to health plans at the level they deem appropriate for their organization. Exciting stuff, huh? Actually, it is. Demographic trends show our population getting older, and economic data shows that we're spending more and more on health care. Also, in case you haven't noticed, the health-care industry is becoming increasingly consumer driven. National carriers such as Aetna (NYSE: AET ) , Cigna (NYSE: CI ) , and WellPoint (NYSE: WLP ) are all developing more consumer-oriented options. That's exactly the niche where Healthways fits in.
Healthways was also Tom Gardner's recommendation for Motley Fool Stock Advisor way back in April 2005. Practically no one on Wall Street knew it existed then. And today, there are just 14 analysts following the company. That's half the number following Sirius and XM (each, not total).
You really have to wonder: Why all the interest in a couple of stocks that have underperformed the S&P 500 over the past year? And why even less interest in Healthways, which is up more than 50% since Tom recommended it?
It's quite simple, really. Healthways is a smaller company, and its business is far less glamorous.
Fortunately for our members, Tom 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 the newsletter service opened for business in the teeth of the bear market in 2002, members have earned 60% returns against an S&P average that's up just 18%. If that's the kind of performance you're 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 Dec. 15, 2004. It has been updated.