Playing with fire, aka hot stocks!
In my 15 years of trading and investing in the stock market, I have never been fond of the so call “hot stocks”. The fundamental problem with “hot stocks” is by the time the news reaches the public; the stock is usually over-priced at that point. Consumed by greed, people are tempted to join in on the action in fear of being left behind. The media sometimes further hypes the stocks. We see this every morning on CNBC where some analyst is being interviewed and touting a stock. Once enough people have jumped aboard, the institutional investors then dump their positions, leaving the small investors holding the bag. Despite the dotcom fiasco, people still haven’t learned this important lesson. Lesson number one; never attempt to jump on a train when it’s going at full speed. Lesson two, don't play with fire because you will get burn!Let’s take a look at a couple of stocks which is extremely over-priced without justification. The first stock is RightNow Technologies (RNOW). This is one expensive stock. It is trading at a P/E of 152, which is ridiculously high by any means. For a company that only made $7.6 million last year, this is one expensive stock. The expectation is through the roof. I realized the on-demand CRM space is growing rapidly, but this stock makes GOOG look cheap. The same issue with Salesforce.com (CRM); the P/E ratio dwarfs RNOW at 770. Yes, that 770 times expected future earnings. Talk about high expectation, this is one stock that must deliver beyond expectation or else! Yes, Salesforce.com appears to be doing well, but not enough to justify their valuation, in my opinion. These are just two of the companies I would stay away from given their out of whacked valuation.
A more proven approach is to look at companies that have recently stumbled or received over blown negative press. Three companies come to mind, Pfizer (PFE), Yahoo (YHOO) and Dell Inc. (DELL). Pfizer will recover from negative press and will continue developing new drugs, Yahoo! will not go down without a fight; the search game is not yet over, and Dell is beginning to get their acts together again. Why would anyone jump at the chance of buying these stocks when Wall Street is so bearish? Well, its understanding and knowing the fundamentals of these companies that gives one the courage to buy when others are selling. See previous post on Evaluating stocks and Homework Matters. Best of luck!
