Monday, December 20, 2010

MicroCap Investor Blog; A Rose By Any Other Name

One of the most important decisions corporate founders make at the start of their venture is naming the company. A good name resonates with customers and investors and conveys something solid and unique about the business and its leaders' vision.
In microcap land it's no surprise that companies often take poetic license when naming, which is clearly an attempt compensate for certain deficiencies. But larger firms are often just as guilty for using excessive flair or futuristic names.
This article, Equity X factor often spells exasperation, examines companies using a particular letter. "Investing legend Peter Lynch once warned that 'a flashy name in a mediocre company attracts investors and gives them a false sense of security', and he specifically cautions against buying stocks that have an x in their name."
The reporter put Lynch's advise to the test by reviewing 109 stocks in the Wilshire 5000 index that either begin or end with an x, or both. He found that less than half of them made a profit in the past year and that they trade at 29 times trailing earnings versus 18 for the entire index and are twice as volatile on average.
The x factor goes beyond just merely frothy valuations. We're reminded about two classic fiascos: Bre-X and Solv-X, which both ended very badly for all concerned.
Several years ago I read "Running Money", a book by hedge fund manager Andy Kessler in which he tells about his price-name rule. The lesson is simple: "Never invest in a company with the target price for the stock in the name of the company." With tongue-in-cheek, he lists Uni-Phase, Liber-8, Take-2. My favorite is NetZero.
Lynch's warning about flashy names should serve as a red flag, particularly for small, speculative companies, which are bound to take a tragic turn.
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About Josh Levine and Levine's MicroCap Investor
Josh Levine has 25 years of senior-level experience in analyzing technology trends and investing in top-performing micro- and small-cap stocks. He excels at assessing management teams and evaluating new innovations and their impact on corporate valuations.
In 2002 he joined independent investment-research boutique ChangeWave Research, where he was editor of ChangeWave MicroCap Investor since 2004, becoming Levine's MicroCap Investor in 2010. He has been editor of the flagship ChangeWave Investing since 2007.
Levine is also senior analyst for ChangeWave Research. Through its survey network comprised of 25,000 members, ChangeWave tracks the rate of change in corporate and consumer demand trends and provides the results through an institutional research subscription service. Its macroeconomic research is among the best on Wall Street.
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