The stock market is a voting machine in the short term but a weighing machine for the long haul. When momentary worries and celebrations seem more important than true fundamentals, the imbalance creates unique buying and selling opportunities for smart investors.
Today, three Motley Fool contributors will reveal three stocks in which the votes don't match the underlying business' true weight. InvenSense (NYSE:INVN) and IBM (NYSE:IBM) deserve more market respect than they're getting, according to our experts. Meanwhile, Twitter (NYSE:TWTR) looks like an overvalued lightweight.
Ashraf Eassa ( InvenSense ): I believe Wall Street is wrong about motion-processing specialist InvenSense. Following the company's most recent earnings report, the shares -- for good reason, mind you -- sold off. After the company missed consensus revenue estimates and reported a surprise inventory writedown, it isn't surprising that some investors might get frustrated with the story and sell.
However, stocks like InvenSense tend to draw in "extreme" views. When things are going well, and the rumor mill is full of "great things just around the corner," such as winning the Apple (NASDAQ:AAPL) iPhone contract, revenue estimates skyrocket, as does the share price. When things don't go as expected -- and sometimes overly lofty expectations are to blame -- the share price tends to move violently downward.
Right now, the focus is very much on what could go wrong for InvenSense. Could InvenSense's largest customers, Apple and Samsung (NASDAQOTH:SSNLF), second-source components that they are currently single-sourcing from InvenSense? Sure. Could InvenSense fail to gain traction in the midrange and low end of the smartphone market, thus causing a meaningful slowdown in earnings and revenue growth? Yes.
However, given that InvenSense is still trading close to its 52-week low, and that its technology has been good enough thus far to win the gyroscope and accelerometer spots in just about every relevant high-end smartphone, I believe a lot of the pessimism has already been baked in to the share price.
This doesn't mean the stock still can't go down if things get worse. However, I'm betting InvenSense going forward will avoid the execution issues that it saw last quarter, and that the company can keep its technology a step ahead of its competitors', allowing it to defend its positions in key devices.
Anders Bylund (IBM) : Wall Street at large seems convinced that IBM is up the creek without a paddle. Share price has fallen 13% in 2014, punctuated by a 10% plunge when third-quarter results were released. Meanwhile, the S&P 500 gained 12% this year. The stock has gone back in time, trading at prices not seen since 2011.
In my view, Big Blue's sellers are focusing on short-term hiccups while the company sets up for another multiyear run of fantastic results. It's a totally backward reaction that once again shows how shortsighted investors and analysts can be.
Yes, IBM missed earnings targets in the third quarter, and also backed down from its five-year plan to hit $20 in operating earnings per share in 2015. Transforming a top-to-bottom solutions seller like IBM into a focused software and services business can be painful, but in the long run, it's absolutely the right decision. Big Blue is leaving a largely unprofitable hardware operation behind, selling it off like a stolen car -- in bits and pieces.
IBM has changed many times. This is just the latest in a long line of wholesale business overhauls, and each remodeling has been absolutely necessary.
So IBM is gearing up for several years of strong results based on a higher-margin business mix. Critics say you should sell Big Blue because it is missing a few short-term targets along the way. But Warren Buffett is still buying IBM shares, even after the allegedly disastrous third-quarter report. Maybe you should be a buyer, too.
Tim Brugger (Twitter): It was a little over a year ago that investors were all aflutter over Twitter. Looking back, the first day's 73% appreciation from the microblogger's initial public offering price of $26 shouldn't have come as a surprise. Twitter's stock price has since bounced between $29.51 a share to a high of nearly $75, and there's no reason to think that will change anytime soon -- which is why so many on Wall Street are getting it wrong.
Twitter CEO Dick Costolo and team have been forced to address the company's valuation concerns since its IPO. The fact that those concerns persist over a year after the IPO speaks to how little substance stands behind Twitter's valuation. But that hasn't stopped the majority of analysts covering Twitter from singing its praises: Twitter's average stock price target is $52.29 with an overweight rating, about 35% above current pricing.
Costolo is trying to stem slowing user growth and engagement, as he stated during Twitter's first-ever analyst day. Twitter's new "instant timeline" will help limit new users' barriers to consumption, and Costolo plans to incorporate video to keep tweeters engaged and to drive ad revenue. Finally, the 500 million visitors to Twitter who don't sign in, according to Costolo, are a huge opportunity.
Wall Street should be asking: "Why Twitter can drive so much traffic, yet not make the service enticing enough to convert visitors to monthly active users?"
There's simply no fundamental basis for Twitter to trade at nearly 400 times trailing consensus earnings, let alone well over 100 times future earnings. Will Twitter's stock find its way to analysts' target of $52.29 a share? Probably, and it's likely to fall back again. That's what momentum stocks do, no matter what the pundits say.
Anders Bylund has no position in any stocks mentioned. Ashraf Eassa owns shares of International Business Machines and InvenSense. Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, InvenSense, and Twitter. The Motley Fool owns shares of Apple, International Business Machines, InvenSense, and Twitter. Try any of our Foolish newsletter services free for 30 days.