Fans of wearable computer maker Xybernaut (NASDAQ:XYBR) often write in to argue the case for their company (which I've panned in the past for producing mountains of press releases, selling tons of shares, but neither producing nor selling a terribly large number of, well, wearable computers).

Seeing what happened to the price of CarMax's (NYSE:KMX) stock yesterday (it jumped 13%) reminded me of one email in particular. In the email in question, the writer argued that I was wrong when I said CarMax looked cheap (in one column), ergo wrong when I said Xybernaut looked overpriced (in a completely separate column). So today, I want to bring the two columns -- and the two otherwise unrelated companies -- together in a single column, and briefly look back over what has made one a successful investment, and the other, well, not.

On Sept. 2, 2004, when my column Autumn of the Automakers ran, arguing that production cuts by America's Big Three automakers could benefit CarMax, that company's stock price opened at $19.45. On the same day, Xybernaut opened at a buck twenty. Five months later, CarMax now sells for $33.35, while Xybernaut stock fetches just $1.09 a stub. Put another way, CarMax: +71%; Xybernaut: -9%.

In this Fool's opinion, the reason for the divergence in the two companies' performance arises from three main factors:

  • Profits
  • Valuation
  • Dilution

Xybernaut lacks the first two entirely. No profits means there's no way to work a meaningful P/E. In contrast, it has dilution in abundance, with a share count that has more than doubled over the past two years. "Boring" used car salesman CarMax, in contrast, has just preannounced the best fourth quarter in its history as a public company, a quarter in which it expects to earn at least $0.23 per share -- a quarter in which it has never before earned more than $0.21. Granted, I have concerns about the company's valuation today (read about those here). But back in September, CarMax looked quite the bargain. And as for dilution, CarMax's share count over the past two years has gone from 103.1 million to 104.1 million (a dilution rate of less than one half of one percent per year.)

In closing, let me make one thing perfectly clear: I do think CarMax is overpriced today. But it's the company's strong fundamentals that got the company's stock price up to where it is today. As for how Xybernaut got as pricey as it still is -- I haven't a clue.

Read more about the better of these two businesses in:

Fool contributor Rich Smith has no position, short or long, in either of the companies mentioned in this article.