Investors in once-little-known small-cap Adept Technology (NASDAQ: ADEP ) had a riveting 2013, with shares up more than 400%. Those kinds of monster gains are nothing to laugh at, and leave investors with several questions: What caused this incredible rally, and is the party over yet?
Breaking down a 400% return
Before buying or selling any stock, it can be very helpful to analyze why the stock has moved in order to evaluate what the stock market's expectations are for that particular company. When an investor has a good idea of what the market expects out of a company, then she can better evaluate if an investment is warranted. For Adept Technology's share price, the 400% change can be evaluated by looking at revenue and the price-to-sales ratio.
According to this graph, Adept's revenue, the orange line, is unchanged over the last five years. The blue line represents Adept's P/S multiple changing over time and shows that in the last year it has increased by more than 400%.
Which brings us to the two factors that can cause a price to increase. A stock price is equal to how the company is doing (sales) multiplied by how the market feels about the company's future prospects, which is expressed by the P/S multiple.
If a company can increase sales or if the market raises its expectations, it causes the stock price to go up.The higher the multiple, the more optimistic the market is about a company's future. So just why has the stock market raised it expectations for Adept over the past year?
The market's changing expectations
The incredible rally in shares of Adept largely began when the company's new management team started to show signs of increased profitability. This perceived turnaround sent shares higher, and when Google started acquiring numerous robotics firms, shares went supernova and exploded in hopes of an acquisition of Adept.
In the video below, Motley Fool analyst Blake Bos describes what caused Adept's incredible rally, delves into whether the company's turnaround efforts warrant the huge spike in share price, and points out what to watch for in the future.
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