In what seemed like overnight, Mellanox Technologies, Ltd. (NASDAQ:MLNX) went from a company with growth of 150% to a company with growth of 68% to now issuing Q1 guidance for near flat growth yoy. For the last year there has been some speculating that Intel Corporation (NASDAQ:INTC) would create too strong of competition and that sales could fall flat. Yet management insists that its recent fall is temporary, caused by seasonal weakness and a $30 million inventory buildup that slowed sales.
Therefore, after a very sharp decline, investors have begun to buy back shares, and the stock has seen a 15% rise during the last week following news of a recent partnership, combined with news of its InfiniBand adapter cards being used in a high-end server data warehousing system developed by Microsoft Corporation (NASDAQ:MSFT). Investors view these catalysts as two that could produce fundamental growth, and now expect to return long-term gains with the inventory issues a thing of the past.
The problem with Mellanox Technologies, Ltd. (NASDAQ:MLNX) is that it’s hard to determine what’s next from management. For the last two quarters the guidance has been disappointing, and management always insists that it’s a one-time event that is creating weakness. Perhaps retail investors are right and now the company will continue to grow.
However, I find the guidance of the last two quarters to be hugely disheartening, almost creating distrust towards management. Therefore, I want to see the company’s upcoming quarter before I say to buy. At this point, it’s projecting zero growth yet trades at 22.50 times earnings, which I consider expensive for zero growth. As soon as the company reaffirms growth then my outlook will change, but until then, I use recent history as an indication that there could be more surprises on the horizon, and that 22.50 times earnings is too expensive for a stock with such uncertainty.
Conclusion
In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I discuss market psychology and teach investors how to capitalize on the illogical behavior of the market. One of my fundamental teachings is that price dictates outlook, and that by understanding this very basic philosophy you can remain one step ahead of a panic-happy market. The key is to determine if loss is fundamentally warranted, or if it was due to a change in perception. If the latter, you can find distinctions between fundamentals and market behavior to return very large gains when a stock reaches the bottom of a trend lower. In my opinion, the above stocks are an example of both scenarios, and in time we will see if I am correct.
The article 2 Fallen Growth Stocks: 1 to Buy & 1 to Sell! originally appeared on Fool.com and is written by Brian Nichols
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