where supply and demand collide
Everyone is aware of names like Cisco, Microsoft, Starbucks, Hansen Naturals. Everyone has read stories of how those companies have made their initial investors millionaires. But how many of us know the history of their stocks and how everything began ? After close examination of the best performing stocks in the history of US markets, you will find that they share many common characteristics and their stock price follows a similar pattern.
Let's analyze the price cycles of a typical growth company: For description purposes I will call this hypothetical company – "our company".
1) The company is not recognized, underfollowed. It is thinly traded. In many cases volume doesn't exceed several thousands a day. Then it comes up with surprising triple digit earnings growth, which shocks the street. The very same day it is traded with volume 10 times the average and its stock price appreciates more than 50%.
2) It gradually starts to attract the attention of a few mutual and hedge funds, which in an attempt to outperform the market, are willing to take the risk and invest in a small lesser known company. They carefully analyze the prospects of the company and decide to put some money to work for a long-term by slowly building their position.
3) Our company comes up with second, third, fourth earnings announcement, which again surprises the street. More and more analysts are following the company. More and more funds are catching the train, which ultimately send its price in the sky. The big money is having big plans for our company. How much the company would cost if it goes nationwide, or even better - worldwide.
4) The company appears in IBD, because it already has very solid history of strong fundamentals and technicals. It attracts the attention of individual investors, who see the next opportunity for easy money. The company continues to show some excellent earnings results and surprises the street, which is now ready to pay higher p/e multiple for it. Why is that? Having a history of substantial earnings' growth leads to higher trust. The P/E ratio reaches the upper double digits (let's say 70 or 80), which is still considered very reasonable taking into account the huge potential for sales and earnings' growth that our company possesses. Don't forget. Everyone is projecting what would happen if our company goes worldwide.
5) N.Y.T., Businessweek and Barron's prepare articles for the company. Why so late? People like to read about something fancy, about the extreem and unusual, about the big success or the big crash. It goes up another 10-15%.
6) The earning season is approaching. The company rally 20 % in expectation of earnings. It continues to show an amazing earnings' growth, but this time it doesn't meet the expectation of the street by tiny 7%. The expectations were way too high. The next day it plummets 15 %. The stock has lost its momentum. The sharks are smelling the blood and are shorting the stock. For one month it loses half of its market cap… No one talks about it, no one writes about it.
7) Shorts continue to push the company's stock down, confident that its earnings' growth is over. Its PEG ratio approaches and even goes below 1. Here they come, the "value" investors with their calculators, who think that the company is undervalued and want to own it at this price. They gradually start to build positions. It's not far the period, when the shorts will be squeezed and that will additionally drive the price upward.
8) The company finds its price range and continues to trade within it for the next several years.
This is just a case scenario and cannot be applied to all super growth stocks. But… it happens more often than you might think. Glance back in the history of the most successful stocks ever and you'll find that they follow a very similar path.
Top 10 list on the ten best stocks of the 2000-2005 period
Company 6-yr pct chg.
Hansen Natural(
HANS ) 3,739%
KCS Energy (
KCS) 3,251%
IRIS International (
IRIS) 3,248%
Amedisys (
AMED) 3,181%
Quicksilver (
KWK) 2,929%
American Healthways (
HWAY) 2,801%
Cheniere Energy (
LNG) 2,746%
Chico's FAS (
CHS) 2,367%
XTO Energy (
XTO) 2,363%
Palomar Medical Technologies (
PMTI) 2,225%
Check for yourself what happened with those companies after 2005.
What is about to happen in the future is already happening. Look for clues...
