May 25, 2005
When should a stock rise by 18% in a single day? When it reports blowout earnings? A major customer win? How about when it hooks up with an important new partner? They all sound good, don't they? Of course they do. But you'd be hard pressed to find a single stock that's seen its shares rise by that much for such legitimate reasons.
Yesterday, TiVo (Nasdaq: TIVO ) , a past Motley Fool Stock Advisor pick, joined the list of small-cap skyrockets to see its shares jump on the basis of nothing more than a few positive words from an analyst. That's right. Nothing changed about the business. We just found out that Richard Baldry, an analyst with First Albany Capital, likes TiVo. (Cue voice of Jim Carrey as Lloyd Christmas from Dumb & Dumber.) He likes it uh-lot.
Baldry, who owns shares of the digital video recorder company, initiated coverage of TiVo with a "strong buy" rating and a per-share price target of $16. He thinks the market misunderstands TiVo's economic value and that the stock is trading at a significant discount on a price-to-sales basis. The thesis, apparently, is that TiVo's market will continue to grow at more than 100% per year and that the company will make substantial gains on recurring service revenue as its subscriber base expands.
I have nothing against Baldry. In fact, I mostly agree with his assessment. But I do hate the decidedly un-Foolish herd mentality that characterized yesterday's buying spree. There's simply no substitute for fundamental research coupled with buying on the cheap. Doing so creates market-thrashing returns over a lifetime. Buying on hype doesn't. So if you bought TiVo three months or three years ago, congratulations. Yesterday was a big day for you. If you bought yesterday, good luck. You're probably going to need it.
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Motley Fool contributor Tim Beyers yearns for TiVo but will settle for his DISH Network DVR. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking his Fool profile, which is here. The Motley Fool has a disclosure policy.