Here's a hot investing tip: Stocks are risky.
No matter what your Uncle Lenny told you at the last family reunion, that's still a fact of life. And it's one many investors are becoming reacquainted with lately. Monday, they got a particularly harsh dose of learning the hard way when
, a highflying B2B software company, said it would rejigger how it recognizes revenue. The stock took a haircut to the tune of 140 points, or 62%, to end the regular session at 86 3/4.
MicroStrategy's plunge illustrates that despite the apparent invincibility of the stock market in recent times, it is still an arena where investors put their money at risk in hope of gain. It underlines once more just how risky stocks can become in the hands of momentum investors, who create huge gains with their frenzied buying but tend to bail at the slightest whiff of a downside. And the plunge shows just how quickly the sickness can spread.
Climb Every Mountain
On Monday, for instance, MicroStrategy's decline reverberated throughout the customer-service-and-analysis software sector.
lost 46 3/6, or 22%, to 165 3/8;
lost 5 7/32, or 12%, to 38 3/4; and French software-maker
slipped 9, or 7%, to 119. The
, hit hard by the software retreat and a widespread
selloff in biotech, closed down 188 points, or 3.9%.
"MicroStrategy had achieved sort of a cult status within the software group," says Eric Efron, co-manager of the
USAA Aggressive Growth fund, which didn't own the stock. "People were willing to pay whatever price the market set. It became a pure momentum play and this is typically what happens to momentum plays: They go off the cliff as quickly as they ramp up it."
Indeed, MicroStrategy's rise, like its fall, was swift. On Feb. 29, the stock closed at 139 1/16. Just 10 days later on March 10, it traded at its 52-week high of 333, about 140% higher.
On the Cliff...
...and Falling Off
Account for This
MicroStrategy did help push itself off that cliff, though. Until now, the Vienna, Va.-based company had recognized a good bit of revenue from contracts paid over time upfront. Monday, it announced it would defer revenues for some complex contracts.
Accounting issues, when they arise in the form of earnings-and-revenue restatements, almost always send stocks into a tailspin. But while MicroStrategy's accounting may have been aggressive, what it did doesn't exactly amount to a high crime on Wall Street. Rather, a stock trading at more than 1,100 times earnings had simply been bid to a price that was perhaps past perfection, in a market that has been nothing if not momentum-driven.
When that happens, it's usually the result of "me-too" investors who don't want to see a rocket pass them by.
"The market makes the headlines every day," says Charlie Mayer, director of investments at
, which doesn't own MicroStrategy. "People see this, and they hear their friends talk about their winners -- because no one talks about their losers -- and they all want to get involved."
Taking a Beating
And who can blame them? As Mayer points out, with some of the short-term gains that stocks have posted in recent years, the greater-fool theory may apply to the person who hasn't gotten in. Still, Mayer subscribes to a long-term investing philosophy based on research and knowing the companies in one's portfolio.
But that's not what MicroStrategy's valuation would suggest investors have been doing.
"There's a lot of stocks today that don't trade on fundamentals," says Kian Ghazi, an analyst at
, an investment firm in New York. "In that environment, the first sign of a loss of momentum -- or something worse, like something detrimental happening in the business -- the stocks take a beating. That's what we saw today with MicroStrategy."
Translation: Maybe it's time to head back to Investing 101.
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