Sector investing in ultra hot segments -- think now of nanotech and voice over Internet protocal (VoIP) -- has been particularly good for momentum traders. This does not mean, however, that there's no danger or that negative news is ignored.
Consider Verso Technologies
But one slip -- one miss of investor expectations -- can be an instant buzz kill. Last week, Verso projected fourth-quarter revenue of $15 million (plus or minus $500,000). The problem: The prior estimate was $19 million to $20 million. As a result, the stock plunged 40% (not even an Olympic champion could ski the stock's near-term chart).
In fact, the revenue short fall will mean negative EBITDA and, of course, negative earnings per share.
This is by no means to imply that Verso is a bad company. Likely, it is merely experiencing the gyrations typical of a small, growing company. The recent lengthening of its sales cycle, for example, is fairly common when a product becomes more complex.
There's little dispute that VoIP is undergoing a growth spurt, which should last for many years. But there will be ups and downs. It's unfortunate that a company like Verso is missing out on the opportunities because of problems with execution.
And certainly, there will be big winners in the small-cap sector for VoIP. But execution risk, especially for smaller operations, is a very clear threat. To play the odds, investors might place the bulk of their money on businesses and managements that have demonstrated that they know how to execute, like Nortel
Tom Taulli is the author of six books on investing, such as Investing in IPOs (Bloomberg Press), as well as a professor of finance at the USC School of Business. You can reach him at firstname.lastname@example.org.