Stocks can be broken into several different categories. One of the most common categories is known as "value stocks." It describes an issues price relative to its core fundamentals (dividends, earnings or sales). One that trades below these metrics is considered undervalued; one that trades above these metrics is considered overvalued.
Another popular category is "momentum stocks." This applies to the rate of acceleration in a security's price or volume. The basic premise is once a security gets strong momentum in one direction, it is more likely to keep moving in that direction as opposed to reversing course.
It is not often that a former momentum stock loses it momentum and gets beat up so badly that it catches the attention of value investors. However, it is not unheard of.
Watching GoPro
One such issue that may fit this description in the coming days or months is GoPro Inc GPRO. Shares of GoPro are trading lower by $3 at $16.15 in Monday's session at the time of this writing. After a lower open, it has made a new all=time low at $15.90 and rebounded into the $16 handle.
The American manufacturer of action cameras commonly used in extreme-action videography had an incredible run off it IPO in June 2014. It bottomed one penny off its opening print at $28.65 and closed over $40 two days later.
From there, in momentum-like investing fashion, it soared to its all time high in October at $98.47. Along the way, Wall Street analysts cheered its breakthrough technology, while predicting more gains for the maker of a "camera on a stick".
From there, it has been ugly, except for an extended rally in March through August. GoPro bulls have been trounced. Since peaking in mid-August at $65.49, every sharp decline has been accompanied by a period of consolidation and another move lower.
The last thrust from $30 since it began trading as a public company was instigated by its first EPS miss ($0.04) and revenue miss ($30 million). However, this should have come as no surprise, as the company issued lower guidance for every upcoming quarter since its IPO.
Despite Negatives, Investors Are Intrigued
In spite of all this negativity, many value investors and contrarians have begun to nibble at this issue. Let's examine a few of the possible reasons.
First off all, the issue is under extreme selling pressure from year-end tax selling. Many investors simply want it off their books. Similar to Citigroup, which admitted "they were wrong" on Friday and downgraded the issue from Buy to Neutral and incredibly reduced their price target from $72 all the way $22, other investors may be taking the loss to offset gains and banking on picking it up at lower price in 2016.
For contrarian investors that love to fade Wall Street analysts, Citigroup is not the only firm throwing in the towel. Since October 29, there have been five downgrades of the issue, many slashing their price targets from much higher levels to the lower $20 handle.
Monday, Morgan Stanley came out with the lowest price target on the Street when it downgraded the issue from Equal-Weight to Underweight and reduced its price target from $23 to $12. Analyst James Faucette noted high inventory levels and lack of innovation with its video editing software.
Now that its plight of being a momentum stock has been well-documented, will it ever go low enough to show up on the radar of value investors? At this point, it does not seem particularly likely. Many short sellers are in agreement and banking on it going to zero represented by an extremely high short interest of 31 percent.
As the stock plummets, its price to earnings ratio becomes more and more attractive to value investors. Now under 14 down from its astronomical levels reached in 2014, will any value players begin to size up the issue?
The Value Investor
If and when value investors find an attractive price to purchase the issue, they will need the earning trend to improve or least stabilize. Will the camera be a favorite for a Christmas gift? Will the much anticipated rollout of drones from the company finally happen? Will the company to capitalize on the unique content amassed by its customers?
These questions and many more need to answered for the any of the brave value investors to be rewarded.
Image Credit: Public Domain© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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