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Go-Go Stocks Don't Always Go…
Don't take this as an endorsement of any type, but as an investor with an entrepreneurial interest I have been keeping track of stocks that are considered to be part of the Marijuana Index. Due to the fact that there has been a lot of activity in this area over the past year, wouldn’t you think that these stocks would be going through the roof? Well, guess what — they actually closed out 2014 down. Go figure….
The reason I bring this up is that many of us assume that a popular product, if you will, automatically equals a profitable investment. Unfortunately this is not always the case. It goes right along with the old, sagacious advice that a good company is not necessarily a good investment. Take for instance Chipotle Mexican Grill. Who doesn’t love their food? Especially after a killer spinning class? But at $678 per share, with a PE ratio of 52.87, can there possibly be much more jalapeno-based rocket fuel remaining?
I am a fan of Peter Lynch's theory of buying what you know, but liking the product is only a first step in the security analysis process. An investor cannot be swayed just by the fact that Chipotle Mexican Grill has awesome food; there must be an opportunity for profit there. As much as you might hate it, the numbers matter!
Speaking of buying what you know, I taught a financial literacy class to a group of Miami high school students back in 2011. Part of the class was a field trip to the mall to look at what people were buying and using this exercise as a platform to start researching investment ideas. One young lady in the class suggested we look at Lionsgate Entertainment, because they were releasing the first of a series of movies called The Hunger Games. She had read the books and saw an advertisement in the mall about the coming movie series. She believed that the company that produced the series would do well. We looked at the numbers and decided it was a definite buy candidate. Since then, the shares have almost tripled in price! Now THAT'S a good buy what you know lesson! I wonder if this young stock analyst has any more ideas??
- Helen
Helen Simon has a DBA from Nova Southeastern University and owns Personal Business Management Services she can be reached via email helen@flfinancialplanner.com.