Can a Bad Company Be a Good Investment?
I was scanning the news and this headline grabbed my attention.
As you can see, Research In Motion (RIM) reported that they actually lost money last quarter, but their stock price went up as a result. How can this happen? It is due to the fact that although they lost money, they lost less than what the market expected them to lose. The market prices expectations into the current stock price.
On the other side of the coin, Apple (AAPL) reported earnings for the quarter of $8.2 billion. You’d be pretty happy to make $8.2 billion a quarter right? Well, analysts were expecting $8.75 billion in earnings. A few months ago I was at a party where two gentlemen were talking about what a great company Apple was, and thus it was a great investment. Apple may very well be a great company, but if everyone knows it, you can be confident that it is already factored into the stock price. Apple had earnings of $8.2 billion last quarter yet its stock price has dropped from around $700 to $521 in the last three months, losing 25%. In case you were wondering, RIM’s stock price has increased from $6.91 a share to $14.12 for a gain of 97.25%.
If you think the moral of this story is buy RIM and sell Apple, you’re missing my point. My point is that there is a lot more to investing than picking a great company. In fact, quite often it is much harder for great companies to live up to their great expectations and you can actually lose money investing in companies that are profitable.