Meme Shares Rock, Palo Alto Pops, and Peloton Falls: 3 Things We Learned This Week
Successful investing requires due diligence.
But staring at the stock market tickers or reading the financial headlines all day doesn’t make you a better investor.
Instead, you need to figure out why certain stocks are moving and how – by applying fundamental principles – you could have seen it all along.
Let’s take a look at a few big moves from last week and what we can take away from them. As always, we will enlist the help of the always quotable investment legend Warren Buffett.
1. Meme stocks
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The investment bubble for meme stocks had steadily emptied over the past few months. But earlier this week, stocks of several retail darlings rallied massively, suggesting the short squeeze trade is back in so-called meme stocks.
Video game retailer GameStop and cinema operator AMC Entertainment saw their shares rise 29% and 20% respectively on Tuesday, stealing a $ 1 billion blow to short sellers.
On the same day, BlackBerry was up 7%, Robinhood Markets was up 9%, and Clover Health Investments was up 10%, although there was very little news that triggered the big jumps.
The lesson? Leave short selling to experienced and less risk averse traders. While it may seem obvious that a particular stock is in the bubble area, its price can go up faster and much longer than you’d expect, making the risk-reward exchange of short selling very bad.
“You can’t make big money short selling because the risk of big losses means you can’t make big bets,” Buffett once said. “It ruined a lot of people. You can go broke in the process.”
2. Palo Alto networks
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Up until this week, cybersecurity specialist Palo Alto Networks had a bad summer for stocks. Analysts had concerns that cybersecurity was experiencing weak demand, leading investors to sell Palo Alto ahead of the fourth quarter results announcement.
But Wall Street got it wrong.
On Tuesday, Palo Alto shares rose 19% – their best daily performance ever – after the company’s quarterly adjusted earnings rose 12% year-over-year as sales rose 28% to $ 1.2 billion.
The story goes on
Looking ahead, management now expects revenue to grow up to 25% in fiscal 2021, while expecting adjusted earnings per share of $ 7.15 to $ 7.25.
Take that away? Don’t let poor short-term volatility put you off long-term wealth accumulation. If you sell off a solid growth stock just because you’re frustrated with its performance, you run the risk of being on the sidelines when it actually builds operational momentum.
As Buffett recommends, “See market volatility as your friend, not your enemy; take advantage of follies rather than partake in them.”
3. Peloton Interactive
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Finally, let’s take a look at fitness technologist Peloton Interactive, whose shares fell 8% on Friday after posting disappointing fourth quarter results.
During the quarter, revenue increased 54% year over year to $ 937 million – not too bad. But Peloton’s $ 302 million net loss was far worse than Wall Street expected.
Not so long ago, pelotons were a high-flying darling as pandemic restrictions forced people to exercise at home and fell around 350% in 2020 alone.
But as restrictions are eased and Peloton has to cut the price of its flagship model bike by $ 400 to boost sales, much of that glitz has waned – the stock is now about 50% below its 2020 highs.
The lesson? Make sure that a company’s sales and earnings performance is sustainable before investing in it. While a one-time event can quickly improve a company’s finances, without a clear competitive advantage it will only prove temporary.
“The key to investing is not in assessing how much an industry will affect society or how much it will grow, but rather in determining the competitive advantage of a particular company and, most importantly, the longevity of that advantage,” Buffett once said.
Where do you get it from here
Buffett’s investment philosophy can be summed up simply: buy stable assets at good prices and hold them for the long term.
Of course, you don’t have to limit yourself to the stock market to follow this advice. One steady perk that Buffett’s good pal Bill Gates has a penchant for is investing in US farmland.
In fact, Gates is America’s largest owner of farmland, and for good reason: over the years, agriculture has been shown to offer higher risk-adjusted returns than either stocks or real estate.
This article is for information only and is not intended as advice. It is provided without any guarantee.