Editor's Choice

Why You Should be Thankful for Impossible Expectations

Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

"A cathedral, a wave of storm, a dancer's leap, never turn out to be as high as we had hoped." - Marcel Proust

Under Armour (NYSE: UA) last week reported year-over-year net revenue growth of 24% and diluted net income growth of 23%.  In addition, the company raised net revenue and operating income guidance for 2012 to meet the high end of its previous range.  For anyone keeping track, this marks Under Armour's tenth consecutive quarter of net revenue growth exceeding 20%.  

Naturally, the market celebrated UA's strong quarter by knocking the stock down nearly ten percent over the next two days.  

Wait...what!?  Down ten percent?

Unfortunately, you'd be hard pressed to find an investor who hasn't felt robbed by this phenomenon at one time or another.  Why, they ask, did their beloved stock get crushed after a seemingly-good quarter?  

The answer lies in two words: Impossible expectations.  

Something's Gotta Give

Simply put, Under Armour became a victim of its own success.  Despite an unrelenting chorus of skeptics shouting "Overvalued!" the company's enviable growth the past three years has been nothing short of remarkable.  When the market asked for an inch every quarter, Under Armour ran a mile instead.  As this became the customary routine, the market began asking for that mile.  As investors got excited, the stock price followed suit as higher growth rates demanded a higher P/E ratio.  Wash.  Rinse.  Repeat.  

In the end, when UA pulled back hard after its strong third quarter, it's safe to say we expected too much as our news feeds were greeted with strangely-negative post titles like "Under Armour's Third Quarter Lacked Usual Guidance Upside."

Give Thanks

It's safe to say nobody has enough time to perform sufficient due diligence on every incredible investment opportunity afforded us by the market.  Luckily, as Warren Buffett has pointed out, "The stock market is like a no-called-strike game.  You don't have to swing at everything -- you can wait for your pitch."

As time-starved investors, though, there are far too many pitches at which many of us haven't had the chance to swing.  Looking back, though, I've noted many of my best purchases came as a direct result of watching stocks get crushed after the underlying companies couldn't clear the bar set by the market.  You and I should be thankful, then, for impossible expectations which can serve to draw attention to wonderful long-term opportunities during vicious short-term corrections.  

Under Armour aside, here are some other stocks I believe currently fit this description:

<table> <tbody> <tr> <td><strong>Company Name</strong></td> <td><strong>Recent Price</strong></td> <td><strong>52-week Low</strong></td> <td><strong>52-week High</strong></td> <td><strong>P/E Ratio</strong></td> </tr> <tr> <td><strong>Apple <span class="ticker" data-id="202686">(NASDAQ: <a href="http://caps.fool.com/Ticker/AAPL.aspx">AAPL</a>)</span></strong></td> <td>$591.70</td> <td>$363.32</td> <td>$705.07</td> <td>13.68</td> </tr> <tr> <td><strong>Chipotle Mexican Grill <span class="ticker" data-id="207668">(NYSE: <a href="http://caps.fool.com/Ticker/CMG.aspx">CMG</a>)</span></strong></td> <td>$251.52</td> <td>$233.82</td> <td>$442.40</td> <td>29.25</td> </tr> <tr> <td><strong>MAKO Surgical  <span class="ticker" data-id="216498">(NASDAQ: <a href="http://caps.fool.com/Ticker/MAKO.aspx">MAKO</a>)</span></strong></td> <td>$15.27</td> <td>$11.99</td> <td>$45.15</td> <td>N/A</td> </tr> <tr> <td><strong>Netflix <span class="ticker" data-id="204654">(NASDAQ: <a href="http://caps.fool.com/Ticker/NFLX.aspx">NFLX</a>)</span></strong></td> <td>$69.58</td> <td>$52.81</td> <td>$133.43</td> <td>88.10</td> </tr> <tr> <td><strong>Universal Display <span class="ticker" data-id="204893">(NASDAQ: <a href="http://caps.fool.com/Ticker/OLED.aspx">OLED</a>)</span></strong></td> <td>$32.85</td> <td>$25.45</td> <td>$55.25</td> <td>68.44</td> </tr> </tbody> </table>

Apple might be the most talked-about stock in the bunch but, despite its gargantuan market cap of more than $553 billion, it could easily be considered the "cheapest."  Down over 16% from its 52-week high, shares of AAPL are reeling from a "disappointing" quarter in which it posted quarterly revenue of $36.0 billion and a quarterly net profit of $8.2 billion.  As fellow Fool Evan Niu pointed out last week, when you consider Apple's massive opportunity in China and cash on hand of $121.3 billion (and growing), all while sporting a P/E ratio under 14 and growing net income by 61% this fiscal year alone, it becomes difficult to put together a bear case for the company.

Chipotle Mexican Grill is finally looking much tastier now that it's trading a jaw-dropping 43% below its 52-week high. In keeping with my theme, Chipotle missed analysts' estimates for both revenue and earnings in its most recent quarter.  In exchange for the bad report, CMG shares were given a 15% haircut last Friday as it touched a new 52 week low.  However, Chipotle has more than enough room to grow domestically and, as Fools John Reeves and David Meier note, demonstrates consistently high returns on invested capital.  CMG may fall further from here, but I smell no end to its great long term growth story.

Moving on to MAKO Surgical, it's an understatement to say the company has had a rough year so far; after two dreadful earnings reports in a row, shares of MAKO currently trade almost 66% below their 52-week high.  As I made clear in my post earlier this month, however, I have high hopes for this surgical robot maker's third quarter earnings report next week.  Rest assured, I'll be sure to touch base then to see how MAKO fared.

On the home entertainment front, Netflix has had a great October and is trading up 30% MTD.  That said, this video streaming king still sits nearly 48% below its 52-week high and might as well be the poster child for impossible expectations.  While valuations may appear lofty, remember Netflix has only begun to see the fruits of its investments in Canada, Latin America, the U.K, and Ireland.  If Netflix can continue to keep its content obligations in check, I see no reason it can't once again become the market darling we knew just last year.

Lastly, we come to Fool favorite Universal Display Corporation.  With shares of PANL trading more than 40% below their 52 week high in the face of nearly-unparalleled growth opportunities, it should come as no surprise I'm reiterating now is the perfect time to buy Universal Display.

What Now?

These six beaten-down stocks have great long term potential and are certainly worthy of a spot in your watchlist.  Don't take my word for it, though; if you take your time and do some homework, I'm confident you'll see at least one of these names deserves a spot in your portfolio.

Steve Symington owns shares of Universal Display , MAKO Surgical , and Under Armour. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, MAKO Surgical , Netflix, Universal Display , and Under Armour. Motley Fool newsletter services recommend Apple, Chipotle Mexican Grill, MAKO Surgical , Netflix, Universal Display , and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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