“Those who try to catch a falling knife only get hurt.” – old Wall Street adage
In a recent Nasdaq website article titled The 5 Biggest Stock Market Myths, reference was made to a study which concluded that “Most market prognosticators are notoriously inaccurate.” The article also went on to say that with the advent of the Internet, and the corresponding access to more information, “individuals have an advantage over institutional investors because individuals can afford to be long-term oriented.”
From my perspective, and even if I had not invested a significant amount of time over the past 10 years covering companies like SciQuest, the above would raise red flags. Specifically, analyst suggestions that SciQuest is just one point lower than a strong buy recommendation on the Zacks rating scale.
For those unfamiliar with Zacks Research, the scale is based upon a “simplified rating system,” in which the firm assigns a “number from 1 to 5 for each analyst rating, where 1 represents a Strong Buy recommendation and 5 a Strong Sell.”
According to Zacks, SciQuest is currently rated at a level 2.
The question is simply this . . . is it warranted?
If a picture is indeed worth a thousand words, the answer would be no.
Put aside for the moment the fact that most analysts – as well as industry journalists and bloggers – fail to provide complete or exhaustive coverage in terms of what is really happening in the industry, the above graphic in and of itself is telling.
On September 24th, 2010, SciQuest’s stock was priced at $12.27 a share. Despite a brief surge between 2013 and 2014 – when the stock hit a high of $30.41 per share, as of July 24th, 2015, it is now at $13.32. In short, and if we look at SciQuest stock performance over the past 5 year period, investors have traveled a great distance to basically end up where they had started.
Given the above, how could analysts – who according to the Nasdaq website article are “notoriously inaccurate,” recommend SciQuest as a “buy”?
This is where, in my research for this post, I came across the falling knife analogy.
Referencing two different company scenarios in which XYZ had hit an all time high of $50 per share the previous year, but has now dropped to $10 per share, and ABC company who, although smaller, has recently gone from $5 per share to $10, the question that was posed is which stock would you buy?
While the majority would buy XYZ’s stock, believing that it will eventually rebound to the higher level this, according to experts, is a “cardinal sin in investing.” The reason offered is that pricing is only one part of the total equation, and that seeking to invest in “high-quality” companies that are undervalued by the market, is the best way to go.
Looking at the above graph, into which category does SciQuest fall? A high flier coming down to earth or, an undervalued gem?
Based on my coverage over the past 12 to 18 months, the answer is fairly obvious.
Now you may wonder why those within our profession should be more interested in this information than say, the pay-to-access “analysis” by a Gartner, or anyone else professing to have the inside scoop. Of course when I say scoop in the context of traditional sources of information, what I am really talking about are the tired old analyses that ultimately mean very little in terms of meaningful outcomes.
The reason is fairly straight forward. While technological analysis has a role to play in choosing a solution provider, it doesn’t help you to chose the right partner. Specifically – and this is the reason why so many initiatives have failed in the past – traditional assessments do not take into account the company and the people behind them. Or as the Nasdaq article best put it, like stock price, technological insight by itself will not help you to identify the high quality company or companies, with whom you can and should work.