What drives the price movements of a company's common stock? In the 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 in the long term, it's valuation that matters. Today, I want to take a brief look at a few of the 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, practically guaranteed to go up. Is it attractively priced? Who cares? Up goes the stock!
Until it goes down. Back in its day, Eastman Kodak
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 and XM Satellite Radio. They're racing to see who can burn all their cash first.
Or look at the latest poster child for unrealistic expectations: Salesforce.com
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 BorgWarner
You really have to wonder: Why all the interest in a couple of stocks that have underperformed the S&P 500 all year long? And why is there less interest in BorgWarner, which is actually up?
It's quite simple, really. You'd have to think long and hard to come up with a name duller than "BorgWarner." The product of mergers nearly 80 years ago, it's a name totally devoid of sex appeal. Yet that very lack of excitement has long kept analysts from noticing that over the past five years, BorgWarner has increased its net income an average of nearly 25% annually.
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 we'd rather buy performance. Since Stock Advisor opened for business in the teeth of 2002's bear market, our members have earned 53% returns against an S&P average that's up 15%. If you're seeking that kind of performance, 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.
Fool contributor Rich Smith has no position in any company mentioned in this article. XM Satellite Radio is a Motley Fool Rule Breakers recommendation. The Motley Fool is investors writing for investors.