Reader Ray Seakan writes:
If my calculation is correct, RACK is selling for 38 times 2006 projected earnings. Its projected growth in EPS for 2007 is 29%. On this basis only, the stock seems fairly valued. Is it just the chart pattern which leads you to believe investors will pay higher prices for this stock? Or is there something else I am missing?
Your opening clause is the tail of the cat. "If... correct" pre-supposes the analysts are correct re their earnings estimates; moreover, I reject the fundmental measure you use as inherently flawed. It is akin to using BMI (body mass index) as some measure of a person's general well-being. An interesting number, but that is all it is.
I believe in the markets -- that any one person could be smarter than anyone, but is not smarter than everyone. I realize that for most investors this acceptance is problematical, but not for me. Please note the sequence of posts in this thread; read this post and also click back (via the embedded link) to the initiating post. The market initially called my attention to Rackable Systems/RACK by bidding higher its shares in a powerful and obvious up trend. But I waited for the market to grant me my opportunity to purchase at a low risk moment: a decline to $32-30 from the high of $56. That $32 area target was explicated from the get-go; I did not wait for the shares to decline, bounce, and then claim the price retrospectively.
So upon the achievement of my downside objective, I began to purchase the shares. Of course the stock could yet breach beneath this level, but I now have the position to manage and at a profit. Most investors sit on the sidelines awaiting some confirmation of a change in trend; certainty. Well, okay, that certainty would first occur with a breach and close above $36. Then would come the close above $37. And then $42. And so it goes; an ever higher price bringing with it its hand-maiden, higher levels of risk. Price = risk.
Your analysis carries with it a bearish cast -- what price should investors pay? Whereas mine has a bullish cast -- what price would investors be willing to pay? Each is correct; neither is incorrect. But I am a long-side, plain vanilla investor only, and not very smart to boot. The easier understood by me, the better. So, yes, chart patterns are important, but in the end meaningless. Too often, patterns in either direction bust before suddenly reversing in the originally perceived direction. This realization must be accepted and factored in to one's analysis. In advance of the subsequent action.
Meanwhile, I note RACK threatens its first breakout at $36, an interior trend line of declining tops. Should that occur, count it as the first obviously bullish brick in the wall. (The first bullish item was that its decline stopped dead in its tracks at $32, the pre-suggested price level.) I also note the very bullish action in Google/GOOG, despite the continued braying from the naysayers. And so it goes.