One of the hardest things to do in my business is deflected ‘hot’ ‘’cocktail party favorite’ stock purchases from clients wanting to buy. What I mean is; oftentimes there are stocks that double or more in a year and have attractive prospects long-term but may not be great purchases. One example was Cisco (CSCO) during the dot.com era.
Looking at Cisco; They were able to double revenue from 2000-2010 (shown below), yet their stock was essentially flat. Not only did you not make money, but you have an opportunity cost of your capital. There were plenty of stocks that were up during this decade!
Why did CSCO’s stock do poorly? Their valuation was too high. As their revenue double, their valuation (measured by price-to-sales) got cut in half (from 6x to 3x). It is not enough to buy a great business, but you must also buy at a great price!
