There will always be stocks that do not trade like you would expect them. Some flexibility when it comes to analysis is necessary even if that just means using a different analytic model. There might not be lessons to learn from stocks that behave like crazy people, but they can be fun and profitable investments. If you can get a sense of why the stock defies reason, which is extremely difficult, you can decide whether it will continue or change.
1. The most inexplicable share price
Amazon.com kept me on the sidelines with its low profits and crazy P/E, before the company drifted into losses. That was my mistake, though I do not think I was alone with that one. Amazon is still scary and I would get downside protection for any investment. The company is my go-to for shopping, and the store is massive. They carry so many products directly or through the marketplace that are odd, but useful or just cool. This is beyond the popular stuff you see on the front page.
The stock has persevered despite the consistent low profits. Grabbing market share is fine, but when is a company supposed to switch gears and actually try to make money. Amazon is trying different things. I have mentioned that my favorite is the leasing of compute capacity, though I do like the company launched publishing houses.
What do you do about a company that has very little profit with a share price that just grows and grows? Probably, the most instinctual response is to say Amazon is overvalued, but it would be considered overvalued at a PE of 100. Now, it is a company that went from a PE in the hundreds to losses, without seeing the share price collapse. I wonder if the company would be able to boost its margins to generate enough profit to eventually satisfy shareholders.
The low price of Amazon's products, even with sales tax, is so important to the company's success. I hold nothing but disdain for people thinking that the sales tax issue is going to push people back to brick-and-mortar businesses. As if paying sales tax on Amazon, which I would pay at any store, is going to make me less lazy.
2. Decade of thumb twiddling
I think Cisco will one day trade in a way that reflects its underlying fundamentals. I am sure there is some vehement disagreement with this one, and it might seem self-serving. I would not have taken a position if I did not think Cisco would one day be above the low $20s.
Revenue and net income have been increasing and Cisco's P/E ratio has been falling, which would be noticeable except that the price has risen a bit from the sub-$20 days. I do not see that as reasonable. Despite all the concern about the future, the current situation is an uptrend in revenue and profit. Some ethereal future is no reason to keep Cisco down. It has over $40 billion in cash, and can do what it likes to boost growth if things get dire.
There might be some concerns about the company's course for the future, and it is fashionable to hate on management. Cisco is being a bit tentative in how it tackles the future, but I am not sure what the company is going to do about the future. I do not support Cisco chasing the dream of being a growth stock, because that will only end horribly.
In my opinion, Cisco just needs something that draws interest to its lasting strength. I think it is reasonable to see it rise a bit higher, preferably $30. Plus, it has been stagnant for the better part of a decade, and with revenue and profit increasing, it makes no sense for a stock to remain where it is, which is a simple yet acceptable reason.
3. Back from the edge, stuck in a rut
I wanted to find something I hadn't written about for the third one, and I have landed on Sirius XM Radio . Sirius was one of my first investments ever. I think it was 2006 or 2007 when the price was right around $1. In my opinion, Sirius defies reason because it managed to pull itself up from the brink in an amazing turnaround. However, despite that and some solid looking fundamentals, it is trading lower than I would expect. In a market where Netflix makes an insane move every few weeks, Sirius stands flat.