Will last year's Doublers do it again?
Have a look at the following chart (copied
from Reuter's site).
The graph shows that
Nutri Systems (NTRI) shares grew by 1,250% in the course of the year to 1
Feb 2006.
I have drawn a vertical
line at
the end of the first 6 months. Clearly the share price grew by 500%
in the first half of the year.
By what percentage did
it grow in the second half? By (1,250 - 500 = ) 750%?
Wrong answer! if
you invested your money on the 1st of August, your investment would have
gone up by 150% only (750/500 X 100).
If the stock continues
its present upward slope (which is becoming a bit rocky), in the next 12
months you will get a return of around 100%. If it continues to
expand into the future at the same rate, the percentage return on future
investments will continue to diminish over time, until, when the company
is fully mature, the growth rate will be similar to that of large
companies like Microsoft or the Banks.
Small Cap companies can
give a better return, because the growth is a percentage of a smaller
starting value. Unfortunately, few small caps are this successful,
so, if you want to be in early and make big profit, you have to take a
gamble. Obviously, if the price falls, then you can suffer a
similarly bigger percentage loss.
The following diagram
shows a stock that grew from less than a dollar to $60 over a 5 year
period. If the growth had been by a straight line, each increase of
$10 in value would represent a diminishing percentage, from 1,000% in the
initial period to 20% in the last period, as indicated. However, the
growth was not in a straight line, and the actual curve would actually be
more normal in real life than a straight line.
Conclusions:
Q. It doubled
last year. Will it double again this year?
A. Yes, near
enough: it will rise by 50% if the present slope continues exactly,
but the graph's slope is more likely to improve or disimprove, depending on the
fortunes of the company.
Q. It went up
tenfold last year. Will it repeat that performance this year?
A. No. If
the trend continues, it will double.
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