This article is part of our Rising Stars Portfolios series.
Thursday: Investors awake and are struck with the realization that, hey, even with the Smart Cover, iPad users may still want a screen protector, right? And did we forget this has absolutely no effect on smartphones and iPods and all the other devices ZAGG covers? Suddenly, ZAGG is up 20% and has its story back.
But wait ...
A huge and valuable lesson just fell into your laps, my fellow investors. It has less to do with ZAGG in particular than with small- and micro-cap investing in general. And it's the reason I rejected ZAGG for my real-money, Rising Stars portfolio: The smaller a company and the more questions surrounding it, the more warped its risk-reward ratio becomes.
You can read more about it here, but in ZAGG's case, the questions were about its concentrated customer base, lack of competitive advantages, and extremely high short interest. Best Buy
It's scary. This is a stock that is virtually screaming to you that it it's going to take very little to send it rocketing -- either up or down. The past couple of days are perfect examples.
The problem is figuring out which way it's going. If I had given it 90-10 odds that the long-term direction is up, I would have bought it for my portfolio. But if the odds are 50-50, there's no way I'm betting on a coin flip.
Foolish bottom line
The problem with ZAGG in particular is that I have even less confidence than that, especially today. The market may have overreacted on Wednesday, but I think investors have realized something: ZAGG is overly reliant on what other companies are doing, and the Apple announcement emphasized that in a way people didn't quite expect.
Now we all realize that not only can Best Buy hurt it, but so can any device maker that decides it wants a cut of that market. The Apple Smart Cover is a great concept that others are likely to copy. Who knows what will happen with other products, such as screen protectors and cases?
I may be wrong and ZAGG may turn out to be a great one for the long term, but I don't like the risk-reward ratio here.
Are you interested in following ZAGG, Apple, or Best Buy? Simply add them to your own free, personal watchlist.
Fool analyst Rex Moore has shed his protective covering. You can keep up with him on Twitter. He owns no companies mentioned here. The Motley Fool owns shares of Apple and Best Buy, which are Motley Fool Stock Advisor picks. Best Buy is also a Motley Fool Inside Value selection, and the Fool has written puts on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.