As the shareholder of an occasionally rebellious stock, I think I've pinpointed investing's biggest pitfall: An investor can be a company's biggest fan and its most forgiving critic.
It's true, don't you think? We spend so much time playing cheerleader with our portfolio that we never take the time to lay down the pompons and dissect the game film. This is problematic, because as shareholders, we're supposed to know our stocks at least as well as other investors. Unfortunately, seeing a stock through shareowner goggles can also make us unapologetic when things go wrong. It's a fatal flaw, naturally, when the smartest person in the room turns into the most naive one.
So, shareholder to shareholder, let me offer a new piece of advice: Ground your stocks!
Go straight to your boardroom, mister
We do spoil our stocks, don't we? We learn to forgive, even when our portfolio is loaded with naughty performers that are betraying the very reasons we let them into our portfolios in the first place.
Let's put your tolerance level to the test. Which of the following four growth stocks is expected to post lower earnings this fiscal year?
A. Microsoft (NASDAQ:MSFT)
B. Target (NYSE:TGT)
C. Carnival (NYSE:CCL)
D. Adobe Systems (NASDAQ:ADBE)
E. None of the above
It can't be Microsoft, right? The world's largest software operator has to be raking in the dough as the global computing population grows. Target? No way. The "cheap chic" message is resonating loud and clear these days, as department-store shoppers trade down to more affordable fashions. Carnival is the top dog in the cruising industry, a travel niche that continues to grow as bigger and better boats are christened. Adobe is the leader in desktop publishing software, with several ubiquitous brands like Photoshop, Acrobat, and Flash.
Drum roll …
Well, it was a trick question. The correct answer is F, all of the above. They are all projected to post lower earnings now than they did in fiscal 2008.
Microsoft is struggling through a slowdown of Vista orders as users wait for the company's new operating system. Carnival is benefiting from lower fuel prices this summer, but weak discretionary income is forcing the cruise-ship operator to discount cabins to fill its ships. Adobe's showing signs of cracking, blaming recent shortcomings on the environment for its creative and knowledge-worker businesses.
Every slip will have an excuse, but it's up to you to determine if it's just a temporary stumble or if this is the beginning of a gradual decline in relevance. I have yet to find a reason why a company like Microsoft will be more relevant in an open-source, cloud-computing future. Target's "cheap chic" crown is going to be contested as more upscale chains learn to play the value card.
Remember that back in 2005, Circuit City was on top of the world. It was rejecting its second buyout offer in three years. It was growing its reach as the country's second-largest consumer electronics chain. But its earnings were going away. And earlier this year, so did Circuit City, in the mother of all liquidations.
Now, that’s unlikely to happen with these four stocks, but you never know where one bad step backward will lead you. So keep a close eye on any of your companies that have declining earnings. Because if earnings continue to fall, so will stock prices. If you're not careful, before you know it, you may find yourself forgiving stocks all the way to zero.
The right way to raise your stocks
There are also plenty of worthy stocks that are actually expected to move in the right direction this year:
|
Company |
2009 EPS Est. |
2008 EPS |
Growth |
|---|---|---|---|
|
Baidu (NASDAQ:BIDU) |
$5.77 |
$4.39 |
31% |
|
Chipotle (NYSE:CMG) |
$3.03 |
$2.36 |
28% |
|
Mindray Medical (NYSE:MR) |
$1.14 |
$0.96 |
19% |
Source: Yahoo! Finance.
Yes, these three stocks -- all active recommendations in the Motley Fool Rule Breakers newsletter service -- were growing faster in the past. But they continue to battle the economy's fierce headwinds, daring to take forward steps.
Baidu is the leading search engine in China, a country with 1.3 billion people who are just warming up to the Internet. Chipotle Mexican Grill is growing same-store sales while other restaurants struggle to keep their registers ringing. Mindray Medical is cashing in on the evergreen market for medical equipment.
If you’d like to read more about them, as well as our top growth recommendations, you can click here to find out more about Rule Breakers.
Isn't that the point, after all? You want to buy the stocks that are moving away from zero by taking steps in the right direction. In this climate, any step forward is a good one.
Longtime Fool contributor and Rule Breakers analyst Rick Munarriz recalls that he wasn't exactly a treat when he was 15. He does not own shares in any of the stocks in this story. Baidu, Chipotle Mexican Grill, and Mindray Medical are Motley Fool Rule Breakers recommendations. Chipotle is also a Motley Fool Hidden Gems pick. Microsoft is an Inside Value selection. The Fool owns shares of Chipotle and Mindray Medical and has a disclosure policy.
