'Invest in What You Know' May Not Be the Best Advice
Magazine Money

Buying What You Know

Apple’s earnings report from the third quarter of 2012 reported $8.8 billion in profits, a 20% increase from the same period last year. Yet following this news, the stock fell 4%. Why?  Wall Street had expected even better results. Analysts had predicted 31% growth for the quarter.  Plus the company shipped 26 million iPhones–26% fewer than it had the previous quarter. Apple had only missed expectations once in the previous 38 quarters. Ultimately, Apple was punished harder than most companies would have been in that situation, because many people came to view the company as invulnerable.

Facebook’s story differs from Apple’s but similarly demonstrates the risk that comes with high-growth stocks. The company released its first-ever quarterly earnings report after going public, showing revenues at $1.18 billion, 32% higher than a year prior. As with Apple, what would normally be considered very strong growth was disappointing, because the quarter marked the company’s slowest growth rate since early 2011. On the day after the official news, the stock closed at $23.15–down 39% from its $38 IPO price from mid-May.

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