The market is supposed to be rational, right? In the current conditions, any companies making profits are good, right?
If you’re able to grow revenues and profits from one year to the next, that a good thing…right?
Imagine you run a business worth US$2.98 billion. Imagine for your annual financial results your company increases revenue by 149% year on year. Your earnings before interest, taxes, depreciation and amortisation (EBITDA) increases 104% year on year. But best of all, imagine if your net income increased by 122% and your earnings per share almost doubled.
In essence, your company is performing twice as well as it did the year before. Better yet, these results trump every market analysts’ expectations.
If you were CEO of this company you’d be pretty happy with those figures. And in a rational market, you’d probably expect the stock price to jump pretty significantly. Right?
What if, after those stunning annual figures, your stock price plummeted 20% the next day? That’s right. Imagine the stock fell 20% within a couple hours of the market opening.
That just doesn’t make sense, does it? Of course it doesn’t. But markets aren’t rational. Investors aren’t rational. And even when a company delivers everything the market expects to see in difficult conditions, it still gets hammered.
However this is a result of mainstream insanity. Where the masses simply do what everyone else does, because they can’t think for themselves. But if you can take advantage of my ‘single rider’ theory — which I’ll explain shortly — you can take advantage of that insanity.
The world’s best wearable tech company at bargain prices
The company results I was talking about above were from Fitbit Inc. [NYSE:FIT]. The stock is the kind of stock investors love to hate. I don’t know why, to be honest. I mean, just have a look at their annual results.
For the year ended December 31, 2015 they brought in US$1.858 billion in revenue. Net profit was US$254 million. Cash and cash equivalents is $664 million, more than three times higher than the same time last year. Active users of their technology grew 152% year on year. Earnings per share at $1.07.
Yet in early trading yesterday the stock was down over 20%. Why? I’ll tell you why. The market is irrational.
In 2016 the company isn’t expecting triple-figure gains in revenue again. But they are expecting around US$2.5 billion — just 34.5% higher.
This ‘weaker’ outlook for 2016 has driven analysts to downgrade the stock across the board. This in turn has seen investors flock from the stock in pure, unadulterated fear.
Clearly double-digit growth for the world’s leading wearable technology company isn’t enough for some. If it isn’t triple figures then it’s just not worth thinking about.
Look, the point here is that the market has gone crazy.
The company is achieving double-digit growth. They’re trading now at a P/E ratio of just 12.48 times. They are launching new models, seeing growth in user numbers and developing growth opportunities with enterprise companies. These are all growth factors the company is looking forward to this year and beyond.
This is a company that’s only been publicly listed since June 2015. Since then its stock price has fallen 55%. This is a company that’s been pushed lower and lower and lower because of fears of future growth. Yet the company is achieving that growth, and could achieve that growth this year too.
None of it makes sense. None of it.
‘Single Rider’ Theory
What it all comes down to is irrational human behaviour. The whole point of running a company is to grow it, make more money and then return money to shareholders.
The idea is that the more you make, the more you grow the company, the more your company is worth. One day you make enough money that you continue to grow and you can also distribute those profits to your shareholders. Everyone makes money.
When you achieve all the things you’re supposed to achieve as a CEO but the market smashes you because they think you’re not doing it fast enough now, well that’s just insane.
But that’s what the market has become. A place for insane behaviour. And with that insane behaviour comes opportunities.
You see people are typically one of two kinds of investor.
One is where they just follow the crowd. Listen to the mainstream masses and then just do what everyone else is doing. That’s why some people join the back of a queue for no reason, without even figuring out what it’s for.
I’ve seen it firsthand. At Universal Studios in Florida there was a big queue for the Transformers ride. People were scrambling over each other to reach the back of the queue.
I said to my partner, Hayley, ‘I bet there’s no need to be in this queue. If we have to then we’ll join it. But I’m going to find out if there’s a better way.’
So we walked to the front of the queue, right to the very entrance of the ride. And there we saw two entrances. One was for all the hordes of people waiting for the indicated 45 minutes wait time. The other was an entrance for, ‘single riders’.
The only difference here was on the ride we probably wouldn’t get to sit together. Still the same ride, still the same experience, just sitting in different seats.
We walked through, got on the ride separately and then met outside at the end. For the rest of the day we walked past queues and queues of people, but we went through ‘single rider’ lines all day. We managed to get on every ride at Universal. Some we went on twice — because we could.
The point here is that if we had just accepted the status quo and followed the masses we’d never have enjoyed the day as much as we did. But with a little investigation, doing something a bit different, we were able to capitalise on the stupidity of the masses.
And the market is just like the many and varied rides at Universal Studios. You can just accept what the mainstream is doing, follow the other sheep and still get on the ride — albeit much later. Or you can think outside the box, and look for small windows of opportunity to gain an advantage.
If you are smart enough and brave enough to take these opportunities, you can do so much more in shorter period of time. You can take advantage of mainstream stupidity and have an amazing time along the way.