How to Profit When Mr. Market Overshoots
During the dot-com bubble, no price was too high to pay.
In fact, investors were willing to pay 76X earnings from Microsoft!
There’s no question that the business was an outstanding one.
At one time, Microsoft’s operating system powered 95% of all PCs in the world.
But to be trading at 76X earnings?
That was sheer lunacy.
Mr. Market was pricing Microsoft to be larger than the U.S. economy in five years.
But eventually, the law of gravity catches up with extremely high valuations.
And in 2000, the bubble burst. Stock prices came back to earth.
Microsoft’s stock price fell with the rest of the market.
But unlike other technology companies, Microsoft continued to do amazingly well…
Over the next decade, Microsoft’s revenue tripled from $20 billion to $60 billion.
Earnings soared by more than 150%.
Yet, the stock price fell by more than 30% over that time period!
Investors were left scratching their heads in confusion.
The lesson they learned: Never confuse a great business with the stock price.
Because the stock price tells you nothing about the business.
In fact, a similar scenario is playing out right now with Snap — the company behind Snapchat.
(If you don’t know what Snapchat is, ask your kids or grandchildren. I’m sure they’ll know.)
When Snap became a public company in 2017, Mr. Market was euphoric.
Investors didn’t care what price they paid for the stock — and it showed.
At one time, Snap traded for 64X sales! Not a multiple of profits but of sales!
Last I checked, sales are not profits.
But like many tech stocks at the time, the stock price disconnected from the fundamentals.
Today, its business is in better shape now than when it went public five years ago.
It’s continued to grow revenue.
But its stock price has been kicked in the teeth.
It’s down 85% from its all-time high last September…
Investors keep forgetting that there’s a difference between the stock price and the business…
Stocks can overshoot on the upside and downside of a company’s underlying worth.
But the way to make money is to…
- Sell the stock when it overshoots to the upside.
- And be a buyer when it overshoots to the downside.
According to my research, Snap’s stock price still hasn’t even come close to being undervalued.
So, I’m still not interested in it.
But in the Alpha Investor portfolio, we have several stocks that Mr. Market has overshot on the downside.
They’re companies in industries with strong tailwinds and being run by outstanding managers.
And they’re currently trading at bargain prices.
I’ll be sending out a shopping list of opportunities that Alpha Investors can get in on soon.
So, keep an eye on your inbox for it.
And if you aren’t already a member of Alpha Investor, you still have time to make sure you can profit from these companies, too!
Find out how to join us by clicking right here.
Founder, Alpha Investor