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My investment philosophy is similar to how I live my life: acquire a few prized possessions at the right price, minimize clutter and maintain flexibility.
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  • Parabolic Stocks: What Goes Up, Must Come Down 0 comments
    May 21, 2013 4:28 PM | about stocks: IEP, RGSE, SCTY, SPY, TSLA, VSAT

    Think the stock market is efficient? Well, I hate to break it to you, it most certainly is not. How can it be when it is driven by market participants who are subject to herd mentality, driving irrational exuberance and undue pessimism at what seems like a moments notice? The steep pops and drops seen in the stock quotes are the voting machine of the whimsical market, pricing companies on hype before fundamentals.

    I've talked in past columns about investing in "disruptive" business models. Certainly, SolarCity (NASDAQ:SCTY), Tesla (NASDAQ:TSLA) and ViaSat (NASDAQ:VSAT) fit the bill. The two former companies are reimagining how we access/generate and use energy, while ViaSat is innovating in the scalable satellite telecommunications sector, providing rural subscribers access to high-speed broadband internet.

    Another company I profiled in early April, Icahn Enterprises (NASDAQ:IEP), also went parabolic in the days following the column (although I like to think I have considerable clout, a Barron's article followed mine that same weekend, and likely helped drive the price higher), when it became apparent that IEP traded at a significant discount to its net asset value ("NAV"), and even below a $63 cash tender price in March 2013.

    The price action in these companies is nothing short of amazing.

    Take a look at the 6 month charts of each:

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    And finally, each company's stock price performance relative to the S&P 500 (NYSEARCA:SPY).

    (click to enlarge)

    As one can see, the four companies have gone parabolic. Investors should not get lulled into the ever appreciating security prices, as risk is certainly mounting in all of the names. That isn't to say that they are not disruptive operating models (or were significantly undervalued in the first place, IEP for example), but the prices appear to have gotten ahead of fundamentals because of market commentary and hype.

    Heck, even another solar panel installer, Real Goods Solar (RSOL), went parabolic last week due to its affiliation as a proxy for SolarCity's operating model. Check out the move last week, up some 227% since May 14, 2013. Admittedly, I don't know enough about RSOL to opine, but it appears that many lower quality franchises are getting bid up significantly too.

    (click to enlarge)

    To me, the parabolic moves are an indication of mounting risk in the market because investors appear to be looking at return first, and considering risk (or permanent loss of capital) second.


    In the short term, it may be advisable to take some gains in long positions off the table in these names and be satisfied with, ho hum, only a measly triple bagger or so in 6 months time, or less.

    Over the long term, I believe some of these companies are game changers (including SCTY, TSLA and VSAT), and may grow into large capitalization companies. In the short term, stock prices are irrational, and driven by short term traders.

    Value investors, who seek to make long term investments in excellent companies, should wait until some profit taking inevitably occurs. That is, to be a provider of liquidity when no one else wants to be, and buy excellent companies with moat-like operating models at a fair price.

    Take heed from Warren Buffett: "For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

    Even if these companies are game changers, buying at too a high price will reduce returns over the long term. Of course, the investing conundrum is as follows, what if these names are still massively undervalued?

    I guess that is what makes markets. But to quote Mr. Buffett again: "While market values track business values quite well over long periods, in any given year the relationship can gyrate capriciously."

    Parabolic moves suggest to me that the relationship of underlying business value and price is out of whack in the short term.

    Be careful out there.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: market-outlook Stocks: IEP, RGSE, SCTY, SPY, TSLA, VSAT
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