We're quick to judge stocks. We value companies based on past results. We dismiss companies that we don't understand. We expect the competitive landscape in any sector to remain the same.
It's silly when you think about it. No one would dare use old stock listings to gauge a company's worth at the moment, yet as investors we fall into that trap. Things change. Prices follow. If you don't believe me, follow the ticker tape. Being a market leader -- or a market bleeder -- is rarely a permanent tattoo.
In the end, that's what separates a great investor from a merely adequate one. Wall Street is an adequate investor. It can weigh the past. It can account for analyst consensus estimates. It consumes only what's on the table. That's not a bad meal. The market's averaged 10% annualized returns over the long haul, and that should fill up most bellies. But are you ready to take the next step and look beyond the plate? Hungry for more?
Buying the invisible
I'm a big fan of CNET Networks (NASDAQ:CNET). I don't own the stock, personally, though I did recommend it last year to subscribers of the Motley Fool Rule Breakers newsletter service. Shortly after singling it out, a fellow subscriber wondered why I sided with a company with such a high P/E ratio. That's the beauty of the service. It's a true community in that readers and writers are always engaging one another.
Did CNET have a high trailing P/E at the time? You bet. Did the forward earnings estimate drop the multiple precipitously, yet CNET was still trading at a lofty bottom line valuation? Probably.
There were other factors that I liked about CNET. With this collection of various popular content sites, I simply began connecting the dots. MySpace has become a dot-com phenomenon for its parent News Corp. (NYSE:NWS), yet here we have CNET with all of the ingredients to go into social networking. It has the active Webshots photo-sharing site. It has a ton of uploaded music from signed and unsigned artists through its Music.Download.com site. Some of its sites, like video game hub Gamespot, also happen to be sticky community sites. The interlocking pieces are there. They just need to be put together.
Has that happened yet? No. However, prime content sites have been gobbled up in a dot-com feeding frenzy over the last year. Ask yourself where the independent Internet sites are and you will come up with names like iVillage (NASDAQ:IVIL) and CNET.
That kind of fundamental shift doesn't show up in an income statement. You can't screen for it. It's something that you sense. Naturally, model-munching analysts hate that kind of leap of faith. Many market mavens prefer to assume that the facts will remain the same. It's easier to feed numbers into a discounted cash flow calculator that way. This may, in fact, work for mature entities, but you would only be kidding yourself if you were trying to evaluate an industry-altering firecracker that way.
Technologies get disrupted. The status quo gets rattled. That's where the great investing opportunities lie. How could one value the potential of Apple Computer's (NASDAQ:AAPL) iPod when there wasn't even much of a market for digital music at the time? How can one assume that the losses in satellite radio will continue for Sirius (NASDAQ:SIRI) and XM (NASDAQ:XMSR) when the industry is still in its infancy and new revenue streams are just starting to be dredged out?
Holding the invincible
Yes, let's talk about some of those revenue streams. Satellite radio has been getting a bit of a bad rap lately. A lawsuit for one. A defecting Chicken Little board member for the other. The stocks have been marked down pretty badly in recent weeks. The services continue to gain in popularity. They started off the year with just more than 9 million subscribers between them and they expect to close the year with more than 15 million avid subscribers.
If the market is down on them because they are losing money as they market and subsidize the receivers to build an audience, it isn't seeing the complete picture. XM raised its monthly subscription rate by 30% last year, and the pricing flexibility wasn't questioned because satellite radio fans kept streaming in. But this is about far more than just $12.95 a month.
This month, a pair of new XM radios will roll out with Push & Purchase technology. Like a song? Push a button. When you dock it on your Internet-enabled port, it will purchase that song as a digital download through Napster (NASDAQ:NAPS).
Slick? You bet. But it gets even better. Couldn't that technology be applied to advertisers, who would then pay XM a bonus for every generated lead? Sure. Keep following the bread crumbs and you will come to a perpetually connected future when you won't need to dock your system at all. You can order tracks, inquire about sponsors, take an interactive poll, and even engage in e-commerce, all with your satellite radio.
Still married to that $12.95-a-month ceiling? File for divorce. Rate hikes and premium channels will bulk up that sum in the coming years. Both Sirius and XM have also tested sending video streams out, something that can ramp up the value proposition if you can stream some cartoons to the kiddies in the backseat on that next long road trip.
The point is that the adequate investor can stick a finger in the air and tell the way the wind is blowing. The great investor can look to the sky and put an ear to the ground to tell which way the winds will be blowing in the future.
XM and CNET are the types of stocks that are singled out in the Rule Breakers newsletter service. In fact, they were both recommended last year. That's just two of the 36 selections, and every pick has a great story to tell for those willing to leave the adequate investors behind and take a chance at making the right call or two to make you great. It's worked out well so far. The average pick is up 30.8%, while the S&P 500 has risen an average of just 7.6%. If that's the kind of greatness you want to be a part of, you can join the growing community now or just kick the tires during a 30-day trial subscription in March.
We're quick to judge stocks. We're slow to judge great investing decisions. Learn the difference, and never settle for being merely adequate.
Longtime Fool contributor Rick Munarriz does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
