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
Until it goes down. Though you ordinarily wouldn't think of insurance as "sexy," back in its day, American International Group
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
Or look at the latest poster child for unrealistic expectations: Google
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
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.