The trouble with stock market “rules” is that most will produce 50/50 results.
The reason for this is that any rule delivering an edge would allow people to lever up and make all the money in the world. Instead a winning rule is pre-empted and turned into a 50/50 by the greedy rush of exploiters.
So rules need to be used in bunches so that a group of tony edges roll up into one decent edge. This is what market filters are all about.
Better still, applying a stock picking rule that others don’t believe in or like, can leave money on the table. This is where contrarian investing comes in. Other techniques like trading a dead cat bounce can also make money, because everyone is foresworn to leave such market action alone.
Yet now and again you stumble across an opportunity that it straight out of an ancient stock market text book and last month I stumbled over such a share.
I’ve just returned from a trip to Silicon Valley. I was frankly stunned ust how little had changed when I lived there in the 1990s. My favorite coffee shop 5 minutes from Apple’s infinite loop was still there, basically unchanged in 20 years. It felt as if the most disruptive industrial area on earth was itself preserved in aspic. It was both uncanny and comforting.
I was expecting the whole place to be unrecognizable, instead it felt like nothing had changed since before the dotcom boom.
Silicon Valley is famous for closing at 9pm when the work-a-holic nerds are either still plugging away at the office or tucked up in bed getting ready for the next day. This might be the reason for the stasis, but whatever the cause it was like a trip in a time machine for me.
While even many of the restaurants are the same I quickly found myself exploring the area for eateries.
That is when it struck me. Everyone was using Yelp.
It was like the old days in Silicon Valley when everyone was using AOL CD’s as Coffee coasters. Yelp is embedded into daily life in Silicon Valley like Facebook, Google and Uber. Yelp is part of the digital infrastructure. If I wasn’t ‘walking the walk’ in silicon valley it would have never occurred to me.
Buying stock in companies who have a great product you use is a classic investment tip. Its so old, its been a cliché that can be costly. A great company with a great product and a sky high market cap is not necessarily a great investment and often this advice in the past has cause nasty vicious circles that have ended in losses.
So there I was looking up Yelp expecting a mind blowing valuation.
Crikey, it has a relatively reasonable internet valuation of 4 times sales. Facebook’s is times 20, Google about 7, Activision 6, Visa 12, Tesla 7 and so on…
Yelp’s $2 billion market cap is snack sized and it has been growing fast.
Couple that with this long term chart and I had to buy.
Yelp clearly has critical mass, love it or hate it appears to own its space on the internet.
Subject to normal market conditions this is a stock that will go a lot higher, even if only on the basis of, that is what internet stocks do as they go in and out of fashion. In the old days actually having a business might ruin an internet stocks valuation, but in the new reality it a strong entrenched position with great growth potential that delivers.
Yelp has that covered. All it takes is a few more users with stock picking tendencies to make the connection and Yelp’s stock price will re-rate.