Don’t Get Fooled by a Stock’s Price
Last week D.A. Davidson Analyst Tim Ramey, who calls Herbalife his "single best idea," issued a report saying that "the bear case is in tatters."
With Herbalife's stock price up nearly 40 percent since mid-April and almost double from its lows of December, he was suggesting the bears are wrong in their claim that Herbalife operates a pyramid scheme. (Never mind that it is still well below its 2012 highs.)
Ramey is entitled to his opinion, but to say the bear case "is in tatters" largely because the stock is up is at best, in my opinion, a classic example of the state of investing today.
In my decades of reporting on stocks and the markets, among the many things I have learned: Just because a heavily shorted stock is up—or a heavily promoted stock is down—doesn't necessarily prove the original investment thesis or concern is wrong.
There are always exceptions, of course, and this dynamic is often magnified for those of us who sit next to a computer all day watching our stock screens, headlines and social news feeds.
Still, the mechanics of the markets have changed. With unprecedented volatility and the speedy exchange of information on the likes of Twitter,for many investors chest-thumping and hubris as well as and anguish and despair over every favorable or unfavorable tick trumps green eyeshades and patience. Emotion gets amplified, not reason.
In the process, the definition of success, failure, victory and defeat is now often compressed into days if not hours, and anybody who doesn't buy into the concept is considered a loser or, worse, a fool.
Trading around the charts and pinpointing the exact point of entry and the fastest exit has become standard operating procedure, with old-fashioned buy-and-hold "investing" relegated to laughing stock status. The concept of long-term short-selling appears to have all but disappeared. Most who practiced it exclusively as a profession either have quit or have been carried out on stretchers.
Yet underlying stock stories, notably short or value-oriented longs, can take more than a few weeks or months to bear out. Some take years.
Which gets us back to Herbalife. The company is in the process of changing rules for its distributors and sprucing up its image. It's unclear how that will impact growth. Yet the stock is up because...the stock is up. The bulls will only be able to claim complete victory if growth doesn't slow and/or regulators or other lawmakers never take a closer look at its model and the multi-level marketing industry. And if investigations ever do materialize, nobody can say with certainty what the outcome will be. Our documentary into Herbalife and multi-level marketing, "Selling the American Dream," suggests reform and oversight may be needed.
Then there is Green Mountain Coffee Roasters: In the face of ongoing social media assaults, enough to get my Hostile React-o-Meter spinning into the danger zone, I raised red flags as the stock was flying higher throughout 2011 toward its peak of $100. Then, after the company reset its growth expectations,it fell to around $20 in the kind of vacuum created when the shorts are squeezed out. It is now back well into the $70s. Yet red flags continue to fly, as do the renewed "you idiot, Greenberg" attacks. Does that mean the bears are more wrong this time than the last? We'll know in several more quarters.
And let's not forget Netflix: This is and always has been a damn-the-fundamentals story and a great humbler for those (like yours truly) who have dared suggest its stock might be ahead of itself. Great service. Great execution. Attempting to be the great disruptor to traditional cable and TV. Maybe, in the end, it will be. Or maybe it already is. Never mind the big $5.7 billion off-balance sheet liability and the negative free cash flow. Between here and there: Zero room for error.
Bottom line: There is a ton of noise in the markets. Always has been, always will be. It's just louder today, largely the result of social media. There is only one preferred method of investing: the one that works for you as long as, in the end, you make more money than you lose. Nobody always wins. Nobody always loses. Time horizons for a thesis to bear out vary by company and investor.
Just because a stock is up or down doesn't always mean a bear thesis is in tatters or a bull story is right. It often just means... the stock is down or up.
I learned this best in the mid-1990s when the now-defunct Media Vision, in its day a Silicon Valley star, was a regular fixture in my San Francisco Chronicle column. After one particularly harsh item, the company's stock rose and CEO Paul Jain called to gloat.
"Did you see our stock is rising?...I hope your short-seller friends go home and beat their wives,'' he said. Less than a year later his company's earnings collapsed, and the company filed for bankruptcy reorganization. Oh, and Jain wound up spending some time behind bars.
Over and out.
Subscribe to Herb at http://www.facebook.com/herb.greenberg
Questions? Comments? Write to HerbOnTheStreet@cnbc.com