Every year, a handful of stocks emerge as intriguing high-growth
stories that attract hordes of momentum investors. Shares of these
hot stocks can climb and climb until the valuations move into the
stratosphere. And then, inevitably, a company can become big enough
that it becomes difficult to keep growing at a breakneck pace.
Growth rates slow, momentum investors flee, and yesterday's hot
stock becomes today's laggard.
That's just what happened to
iRobot (Nasdaq: IRBT)
, which was the darling stock five years ago, but went on to see
its shares fall roughly -80% during the next few years. But this
maker of commercial and military self-controlled devices just
jumped back into the spotlight. After a steady deceleration of
sales growth over the last few years, management just announced a
+67% jump in first quarter sales, far higher than analysts had been
expecting. Over the course of the whole year, management believes
sales can rise some +30% above 2009 levels. Not bad for a company
that actually saw sales shrink in 2009.
It's tempting to buy the stock, even after its nearly +30% spike in
this morning's trading. But shares are not cheap at around 60 times
likely 2010 profits. Some investors are likely to sell this winner
once they see this quite-high price-to-earnings ratio (P/E). Any
sell-off may create a better entry point for investors looking to
get into this high-growth story.
First Solar (Nasdaq: FSLR)
also posted double-digit gains after the thin-film solar vendor
posted solid first quarter results. (In a story last month we noted
that First Solar was one of a number of companies that was heavily
shorted at the time.) The results were boosted by robust demand for
solar power equipment in Europe. Trouble is, those subsidies are
winding down, and future results may not get the same tailwinds as
cash-strapped governments throttle back their support for clean
energy. Then again, any carbon-taxing legislation to come here in
the United States could provide a tailwind. For now, you may want
to book profits, especially since some of the gain is attributed to
short-covering that won't last. And a new set of cynical investors
may look to add fresh short positions now that shares have risen so
quickly over the last few weeks. And that would add fresh selling
pressure on the shares.
You have to be impressed but the astounding ascent of Chinese
Baidu.com (Nasdaq: BIDU)
, which is up another +14% today, capping a rise from $104 at the
nadir of the economic crisis to more than $700 today.
Google Inc.'s (Nasdaq: GOOG)
much ballyhooed exit from the Chinese market earlier this year has
given Baidu a virtual lock on the Chinese search market, which
continues to grow at a torrid pace. Baidu earned around $2 a share
in the first quarter, and is running at a pace of $8 in annual
profits. Shares now trade for around 90 times that run rate. It
feels like the dot.com boom of 1999 all over again. And we all know
how that turned out.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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