I want to keep focusing on what companies are saying. This is the single most important news going forward this year. Economic data are important, especially as they affect sentiment in the broader market, but the key factor for investors this year should be what corporations say about their businesses. After all, they know their operations better than anyone.
Right now, the stock market has momentum and, while I always advocate a buy-low/sell-high investment strategy, a speculative trader can’t ignore price momentum. There are very good momentum trades in this market right now, even though we’re due for a correction.
Stock picking is difficult and there’s a reason why so few people are consistently good at it. It takes a lot of time, resources and patience to be successful at speculating in equities. Right now, the action in the broader market is strong enough to support some momentum positions. But, in my mind, the trade has to be a combination of price momentum and solid underlying business fundamentals. Good corporate fundamentals have to be the underpinning of the trade in order to lessen the investment risk.
Take, for example, Oplink Communications, Inc. (NASDAQ/OPLK), which is a growing micro-cap company that I first wrote about in early February. This small company sells optical networking components to telecommunications customers. Citing strong demand for bandwidth in its latest quarter, ended December 31, 2010, Oplink reported that its revenues grew to $52.0 million, representing a 59% increase over the comparable quarter and five percent sequentially. Earnings came in solidly at $8.5 million, or $0.41 per diluted share, representing growth of 174% over earnings of $3.1 million, or $0.14 per share, generated in the same quarter last year and 52% sequentially. The company finished the quarter with about $168 million in cash (about $8.60 per share) and very little debt.
Oplink reported this news at the end of January and the stock took off to the upside. Then it experienced a short consolidation, and it reaccelerated to its current level, very close to its 52-week high.
This is a great example of an easily actionable momentum trade based on good corporate news. It was, in my view, the right package for an equity trader. Oplink posted great numbers, wasn’t expensively priced (before and after the upward trading action), and had lots of cash in the bank. This trade was actually a no-brainer and the stock still looks poised for more upside.
I’m not usually in the habit of doling out investment advice. I believe that great stock picking can only be learned through experience, just like playing golf or fly fishing. You can learn the basics from somebody else, but, at the end of the day, the only way to get good at it is to go out and practice for yourself.
In this market, I’m listening to what corporations are saying. The rest of the news is useful, but it’s mostly noise. Actionable trading events are prevalent in this market, because stocks aren’t expensive and institutional investors are buying. The best investment advice I can give is to always play the market that you’re given. Profits are more important than being right.