I am a big fan of the phrase “explain it to me as though I was a fourth grader.” Legendary fund manager Peter Lynch used to say not to invest in an idea which couldn’t be illustrated with a crayon. At the risk of looking like an idiot, I admit that there are also times when I run across a great looking chart and then read about what the company does and while I may understand the basic concept I am happy it is something I don’t get paid to figure out.
I found a great looking chart in shares of Broadsoft Inc (BSFT) recently, so I checked to see what they do. Here is part of the description from the company – BroadSoft, Inc. provides software that enables fixed-line, mobile, and cable service providers to deliver voice and multimedia services over Internet protocol (IP) based networks My take is that it is a software company for communications. I think I could draw that with a crayon, or maybe not. Fortunately I don’t get paid to understand and explain the fundamentals of a business and I would certainly be a starving artist if I had to draw for a living.
My job is that of a trader and the job of a trader is to identify situations where it appears there is a reasonable chance of making money without taking too much risk exposure. All of my timing decisions are based on technical analysis. There is no more objective technique to determine a good risk reward ratio than to understand the actual supply and demand for the stock. We make money when our opinion of a stock is correct, not when our perception of their business is good or bad, the market doesn’t care what we think.
Broadsoft recently reported “record third quarter results”, earnings increased 375% from the same three month period in 2010 and revenues were up 60%. They went on further to say margins were close to record levels and that they had $192 million in cash and equivalents. Again, I am not a fundamental analyst but this all reads very bullishly. Technology stocks can be erratic and BSFT initially sold off hard, but recovered quickly and is now comfortably above the closing price of 36.41 just before the earnings were released on November 4. That which doesn’t kill the price action makes it stronger, but it also reveals the volatile nature of the stock, a risk worth knowing for determining the proper position size.
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