Great Expectations, Terrible Stocks

NEW YORK (TheStreet) -- Great expectations often get investors into trouble, especially when reality falls short. We've seen that happen time and time again, yet there's always a new example.

One of the problems is that we don't always distinguish between the perceived magnificence of a particular company and the underlying valuation of its stock. We become enamored with a company, its products and seemingly bright future, but take our eye off the cost of owning a piece of it. We get snookered by the latest fads, and project a future where they are no longer fads but part of everyday life.

One of the reasons that this continues to happen is there's money to be made, especially if your timing is right, and the lessons of the past are quickly forgotten.

Some investors made boatloads of money owning Green Mountain Coffee Roasters (GMCR) as it ran from below $2 per share in 2005 to $111 last September.

But if you were late to the party and believed that the growth story for Keurig machines and K cups was still real and intact, you suffered as shares fell from $111 to $18 in the past 10 months. Shares fell nearly 50% in one day this past May, after the company announced slowing revenue. It no longer mattered that everyone you knew had a Keurig in their kitchen and raved about the wonder of K cups.

This is where valuation once again mattered for this cult stock.

GMCR data by YCharts

Facebook's (FB) reckoning happened much earlier, and the difference between Facebook and Green Mountain (although it's still quite early in the Facebook story), is that Green Mountain built a business virtually in obscurity for many years before becoming widely known and successful.

The Facebook IPO was one of the most anticipated offerings in our history, many wanted a piece of it, and shares were priced ridiculously high. Great expectations and the thoughts of instant riches were dashed because valuations were separated from reality.

Now, it's way too early to put Facebook in the same camp as Green Mountain, and the stories are very different. Facebook has to prove that it's worthy of its current $43.5 billion market cap, and beyond that, the $100 billion valuation shortly after the IPO.

1 2 Next › Last »