5 reasons to not buy a stock based on a single product

If you sit on Twitter long enough (especially Stocktwits) you will see a message like this: “I think XXXX company is great because their new widget is awesome and it is going to shake up the industry.” So the question is out there, should you invest in the company based on this amazing new product?

Probably not!

  1. One cool product does not make a great company. It takes many products over a series of years to make a company that you can be confident will be a long-term hold. Great companies consistently offer good products to their customers and create ways to keep and attract customers over a long cycle.
  2. While there is some bounce on new good news, typically this is just a bounce. It doesn’t last. If you are a day-trader then you may want to take advantage of these “news bounces” but if you want to hold a security for some time, you need more than just a single new cool product.
  3. You are probably late.  Most companies have the majority of their stock held by institutional investors. If this new product was that significant then they have already factored this news into their holdings. Major investment firms do not wake up in the morning, read Engadget, and then decide to buy a company. If this new product was that significant then they were slowly accumulating the stock in advance of the introduction and they were doing it by listening to the company’s statements of direction in their annual meetings, quarterly calls, and analyst updates.
  4. You are swimming against the tide. As I pointed out in 3, most of the stock of many companies is with institutional investors. They aren’t going to buy the inflated price from a product bubble, they will wait until the excitement is over to continue to accumulate. That means the only people you are going to sell your stock to are the fools that also listened to the new product fervor and are late to the game (so they have made a 2nd mistake by being late).
  5. You may be wrong! How many great products have been introduced that simply didn’t live up to the hype? Even great companies will sometimes release a dud product.

Let me give you a great example.  Arguably, the iPhone from Apple is the most significant cell phone ever released to the market. It only operates on the AT&T [stckqut]ATT[/stckqut] network so a few weeks before the introduction of the iPhone in June of 2007, you could have surmised that AT&T stock was going to boom.  Didn’t happen, on May 31, 2007 the stock closed at $24.82. Yesterday, the stock closed at $26.26 – not even 10% growth. Yes, I know that AT&T put out some dividends in that time but those didn’t increase in size either – on April 27, 2007 AT&T gave out a dividend of $.412 and on April 28, 2010 they did a dividend of $.398 (all prices per Yahoo Finance).

On the flip side, Apple [stckqut]AAPL[/stckqut] had a significant rise in stock price but Apple makes a lot of great products and their customers love the company. Apple is a Good Company on my ranking scale, AT&T is not.

Market timing is fine for buying stocks but you should limit yourself to momentum indicators and overbought indicators on Good Companies (see the Watch List on the right side of this site). Don’t try to market time based on product introduction hype.

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