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," and it's as true for stocks as it is for toothpaste. Some stocks are just downright sexy, no two ways about it. That's why 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 backscatter X-ray maker American Science & Engineering
Until it goes down. Back in its day, Dell
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: Gaiam
Why stocks should go up
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 Shuffle Master
You really have to wonder: Why all the interest in a couple of stocks that have performed so poorly? And why is there less interest in Shuffle Master, which has done better?
It's quite simple, really. You'd have to think long and hard to come up with a name duller than "Shuffle Master." It describes the business, but it's totally devoid of sex appeal.
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 46% 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 owns shares of Dell. Dell is also an Inside Value and Stock Advisor pick. XM Satellite Radio and American Science & Engineering are Motley Fool Rule Breakers recommendations. Shuffle Master is a Stock Advisor selection. The Motley Fool is investors writingfor investors.