Every year, a handful of stocks emerge as intriguing high-growth stories that attract hordes of momentum investors. Shares of these hot stocks can climb and climb until the valuations move into the stratosphere. And then, inevitably, a company can become big enough that it becomes difficult to keep growing at a breakneck pace. Growth rates slow, momentum investors flee, and yesterday’s hot stock becomes today’s laggard.
That’s just what happened to iRobot (Nasdaq: IRBT), which was the darling stock five years ago, but went on to see its shares fall roughly -80% during the next few years. But this maker of commercial and military self-controlled devices just jumped back into the spotlight. After a steady deceleration of sales growth over the last few years, management just announced a +67% jump in first quarter sales, far higher than analysts had been expecting. Over the course of the whole year, management believes sales can rise some +30% above 2009 levels. Not bad for a company that actually saw sales shrink in 2009.
It’s tempting to buy the stock, even after its nearly +30% spike in this morning's trading. But shares are not cheap at around 60 times likely 2010 profits. Some investors are likely to sell this winner once they see this quite-high price-to-earnings ratio(P/E). Any sell-off may create a better entry point for investors looking to get into this high-growth story.
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Shares of First Solar (Nasdaq: FSLR) also posted double-digit gains after the thin-film solar vendor posted solid first quarter results. (In a story last month we noted that First Solar was one of a number of companies that was heavily shorted at the time.) The results were boosted by robust demand for solar power equipment in Europe. Trouble is, those subsidies are winding down, and future results may not get the same tailwinds as cash-strapped governments throttle back their support for clean energy. Then again, any carbon-taxing legislation to come here in the United States could provide a tailwind. For now, you may want to book profits, especially since some of the gain is attributed to short-covering that won’t last. And a new set of cynical investors may look to add fresh short positions now that shares have risen so quickly over the last few weeks. And that would add fresh selling pressure on the shares.
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