Lose 33% In 9 Months To Make 1,000% In 15?

Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

 

Many times, when I buy into a new stock pick, I immediately start losing money on it.

This is actually very normal. In fact, many of my picks have initially dropped below my initiation price, only to rebound and generate very high returns. The reason is that I do a lot of research to find companies that are positioned to take off, before everyone else finds it. As a result, I end up getting in early… often too early.

The key is having confidence in the longer-term (1 to 3 years) outlook for the company (which comes from doing your research). This is because it often takes several months or quarters for the rest of the investing community to realize what our research tells us today.

If my industry-expert contacts tell me that they see demand increasing for particular company, it might still take several quarters before that increased demand converts into recognizable revenue. And even then, the company has to report that revenue to investors, which doesn’t take place until several weeks after a quarter ends.

This is a blessing and a curse.

It’s a blessing because we get to buy the stock long before anybody sees that the company is doing well. However, it can be a curse because the stock might drop for several months because nobody knows it should be going up. Nobody knows that the company has started to do well!

My most successful investment ever was a perfect example of this. The name of the company is Absolute Software. I mentioned them as part of my Smith Micro (SMSI) Q1 write-up (because I see similarities in their prospects). I bought shares of Absolute in late-2005 because they had a product called “LoJack for Laptops”.

As you can see from the chart below, after several months, the stock had fallen from $2.00 to $1.40 (a 30% loss). That was very frustrating! I often thought about selling the stock. I wondered why nobody else was buying in. I thought, “Something must be wrong.”

But every time I did more research, I found nothing wrong.

Around July of 2006, the stock was back near the lows it had established in March. My research said that things were really starting to pick up, so I backed up the truck and loaded up.

This time, my timing was perfect.

The next 15 months were electric. Laptop manufacturers, like Dell formed relationships with the company and sales took off.

The stock quickly followed. Absolute basically went straight up for five quarters. It topped out at $30, giving me (and my Wall Street customers) one of our biggest gains ever. I didn’t catch the top, but closed my position around $20.

Those who didn’t do their research or got shaken out by the long Wait Time missed out on a ten-bagger.

abs

 

Moral of the Story: This is just one of many reasons why investors should focus almost exclusively on the company (not the stock) and how things are progressing.

In the short-term a stock can move in any direction. This is partly due to the “fact” that 99% of retail investors look at charts while just 1% read earnings transcripts.

To me, that’s completely backwards.

However, I’m glad it is. By being one of the few retail investors who read earnings transcripts and SEC reports, I’m also one of the few retail investors who actually knows what’s happening at the companies I follow.

And, of course, what a company does is usually the biggest determinant of its long-term stock value.

Cheers.

 

More Research:

 

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Disclosures / Disclaimers: I am long XXX. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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17 thoughts on “Lose 33% In 9 Months To Make 1,000% In 15?

  1. Mark,
    On the Yahoo board Diodgenese put up a copy of a negative review. The interesting take is that a kid can turn off the location finder when does not want to be found along with no history of where went during the day.

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      1. It’s neither. Applications like this are not easy to build out. Plus, there will always be workarounds to virtually anything (which is why the cyber security industry keeps growing).

        Nothing to see here.

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    1. Nice find. FYI, there are lots of competitive products which I found during my due diligence process. The difference is that almost none of the companies have the ability to sell into carriers. They don’t have the experience, trust, or knowledge of how to tie these applications into the carriers back-end IT systems / networks. Thanks!

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  2. It’s funny you say this, when I was beginning I would buy a stock and be disappointed if it didn’t start to run within a week, almost as if the thinking was “OK, now I’m in so everyone else should be getting in” and of course I finally realized that just because I bought today there was NO reason anyone else was going to. I sold way too many stocks way too soon, it’s not easy, as you said, once you bought the thesis was validated, so what’s wrong? That’s how I began buying FIZZ ~12+ years ago at under $10, was patient (not easy for me) and still own it today after it hit a high of $130 last year. We all want instant validation, and patience is so hard to master

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  3. Mark, can you explain how it is profitable to buy a PP ate 2.21 with free warrants but sell the stock short at 1.76 when you bought the stock at a higher price. I would think you would have wanted to short the stock at the offering price or slightly lower not 30 percent lower. I know you explained this is after the first offering but that was only slightly below the conversion price. This was done a lot below the conversion price so where is the profit? Thanks

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    1. Totally agree. It makes little sense at this level, which is why I’m buying more than usual today.

      No matter what, we’re working through the supply overhang. If everything else is as we believe, the shares will dry up and start acting on the fundamentals soon.

      After the last offering, it took 10 days. That equates to this Thursday, relatively speaking.

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    1. Yeah. Thus, I think some weak hands may have been shaken out. I heard that one trader saw 1.80 as support (broken) while others are citing 1.75.

      Another reason why technical analysis is silly. Doesn’t account for a supply overhang’s ability to push a stock down or for the fundamentals to push it up.

      That’s why I stick to the fundamentals.

      I am looking at the share ownership structure though (large holders), to see how many shares are left in the “effective float”. Happy to say it’s looking thin. I’ll try to complete the tally tonight and share it with people who participated in the census.

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  4. IMHO – The value in SMSI is based on their relationships and history with the carriers – particularly Sprint. In my brief analysis of the app I found it to not be as robust as I would hope regarding regulating other apps ie safari and google. Kids can still go on browsers and find illicit images etc with safe and found on. This is not unexpected since yes ‘ there is a work around for everything’ If I can make one suggestion to SMSI it would be to focus on improving the software. The barriers to entry are not exceedingly high in app world and the next logical way to add value is to focus on the software development.

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    1. Much of that is true. However, if you tested earlier versions you would see how much they have improved the product to this point. 🔥🔥🔥

      FYI, I don’t know what workarounds you used, but my host family was able to turn off most of my application access. In fact, with a single swipe of the dad’s finger, most of my application icons completely disappeared from my screen!!! 😱🔥🔥🔥

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