Over the past 30 years of investing, speculating and trading in the financial markets, I’ve heard innumerous so-called financial market “experts” tout hundreds of stocks, often saying that a given stock “could” appreciate substantially over the ensuing years.
Yet, I’ve rarely heard any of those same “experts” tell financial market participants the prices at which they should buy or sell a given stock.
And, most so-called “financial advisors” (persons employed by securities brokerage firms who get paid to open and maintain fully-funded investment accounts instead of getting paid for their advice)… almost never tell clients to sell any of their stock holdings until the value of one or more of those holdings declines substantially.
In contrast, those same sales persons often advise investors to buy stocks only after they’ve risen sharply.
Unfortunately, investors, speculators and traders often discover too late that the type of advise mentioned above generally leads to poor performance results and, on many occasions, to big losses.
Interestingly, I’ve found that doing the opposite of the above tends to result in superior investment results – selling stocks after they’ve risen substantially and buying stocks after they’ve fallen sharply.
That’s especially true for stocks of young, growth companies that are offering new products/services and whose revenues and earnings have been growing at fast rates.
Two examples of the types of stocks mentioned above are Ambarella (AMBA) and Shake Shack (SHAK).
Ambarella designs and develops video-processing semiconductors for the capturing, sharing, and display of high-definition images. The company creates products for the broadcast industry and for various personal electronic devices.
It also designs and develops products for the streaming of video over the Internet.
Ambarella’s semiconductors enable video cameras to be smaller and to operate with less power than similar products offered its competitors.
In an effort to expand its offerings, during July 2015 Ambarella acquired VisLab, a developer of advanced driver-assistance systems and autonomous vehicle driving systems.
Since then, Ambarella has developed several automotive products, including parking-assistance cameras, electronic rear-view mirrors that provide a wider field of view than traditional mirrors and automobile cameras that offer 360-degree video security.
Additionally, Ambarella entered recently into a strategic relationship with Sighthound, Inc., a provider of video software that enables computers to see.
Using Sighthound’s technology, Ambarella is now marketing vision-guidance systems for drones that can detect and track humans and objects, and control drone flight systems.
Ambarella is very strong financially, with its cash alone covering all of the company’s financial obligations by a ratio of 4.8-to-1 as of October 31, 2015, the date of its most recent balance sheet.
Although the company grew its revenues and earnings at very fast rates during each of the past three years (my research indicates that it will continue to grow its revenues and earnings at fast rates over the next few years), Ambarella’s stock declined sharply over the past six months, falling from a high of $126.70 on June 18, 2015 to $50.34 on January 7 of this year.
It closed over the past few days at a price-to-earnings (P/E) multiple of around 21, and my research indicating that Ambarella will grow its net earnings per diluted share at an average annual rate of at least 30% over the next few years. Financial market participants appear to be substantially under-valuing the company’s stock, and my experience suggests that NOW is a good time to establish a position in that rapidly-growing company.
In contrast to my recommendation, well-know financial market commentator and former hedge-fund manager, Jim Cramer, touted Ambarella very enthusiastically on June 8, 2015, when the stock was trading at around $104 per share, but he turned negative on AMBA on September 2, 2015 after the stock had fallen to around $83.
I’m not suggesting in any way that Jim Cramer is not a knowledgeable or experienced investor; I’m only suggesting that you should not buy stocks when they’re trading near all-time highs, or sell stocks after they’ve fallen sharply.
Shake Shack (SHAK)
Cramer was also very optimistic about Shake Shack (SHAK) on May 19, 2015, when it was trading at around $74 per share, telling listeners people will buy the stock regardless of its price and that it could go higher during the ensuing months.
Although SHAK did move higher over the next few days, closing at $92.86 on May 22, it moved substantially lower over the ensuing eight weeks, closing at $48.73 on July 15, 2015. Then, after SHAK had rallied back to around $75 on August 11, 2015, Cramer referred to Shake Shack as “a shining star”.
For those of you who aren’t familiar with Shake Shack, the company operates “roadside” restaurants that offer a classic American menu of freshly-made antibiotic-free Angus beef burgers, hot dogs, crinkle-cut fries, shakes, frozen custard, beer and wine. The company operates 83 restaurants around the globe, including 47 restaurants in 12 U.S. states and 36 restaurants in Japan, the Middle East, Russia, South Korea, Turkey, and the United Kingdom.
Although Shake Shack did not generate a profit until the second quarter of 2015, the company grew its revenues at very fast rates over the past few years. And, my research indicates that it will continue to grow both its revenues and net earnings per share at fast rates over the next several years.
In spite of the company’s fast revenue growth, and the fact that it grew its earnings per share by 5-fold for the quarter ended September 30, 2015, as compared to the same quarter a year ago, Shake Shack’s stock fell on January of this year to the lowest level since it began trading on January 1, 2015.
While my research indicates there’s a good chance that SHAK will continue to pull back over the next few months, I encourage those of you who consider yourselves to be long-term speculators to allocate a portion of your financial market assets to SHAK once it shows signs of stabilizing.
To learn about other growth-stocks that appear to be trading at value-stock prices, I encourage you to try my Free Weekly Market Commentary. Click here to subscribe to that weekly report.
Until next time,
David Frazier is President and Chief Market Strategist of Frazier & Mayer Research, LLC, an independent investment research firm that offers customized research and analytical services to registered investment advisors, hedge funds and high net-worth individual investors. You can check out his latest insights at: www.investorsmonitor.com.