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Business/Finance See other Business/Finance Articles Title: Newton's Code The code has already triggered 44 profit events since January, worth upwards of $38 billion… Opportunity #45 could hit as early as tomorrow… Dear reader, It only took four days for Newton’s Code to mint its latest fortune. But the story started 11 months prior. It happened quietly with very little fanfare. The trigger occurred when company executives from Columbia Sportswear (COLM) struck a sweetheart deal. They slapped $190 million on the bargaining table in hopes of making a strategic acquisition. Their target? Privately owned company, prAna Apparel. PrAna makes sustainable, earth-friendly clothing for yoga enthusiasts. It operates within a booming sub-niche of the apparel business. The company started in a married couple’s southern California garage. It quickly grew into a national threat. Well, Columbia Sportswear got what it coveted so much. PrAna execs bit on the deal. In exchange for $190 million, industry giant Columbia Sportswear acquired prAna. On the handshake, it became a global player in the thriving yoga apparel industry. The cute yoga couple, who once shipped clothing orders in fruit boxes, parachuted out with millions. The Handshake Activated Newton’s Code… I mean that literally. Newton’s Code began working its magic the moment the two parties inked the deal. Of course, nobody knew it at the time. So what exactly triggered Newton’s Code? It’s simple, really. As a direct consequence of the deal, a profound shift had occurred. The “E” (earnings) in Columbia Sportswear’s price-to-earnings ratio (P/E) was no longer correct. It still reflected the company’s earnings power before the acquisition. When the “E” is incorrect, the stock price MUST adjust. Laws of the market dictate that this happen. Newton’s Code tells us the speed at which the price will adjust. Let’s revisit that husband-and-wife tandem so you can bear witness to this powerful law of the market. The couple eventually got in over their head. They lacked the “know how” to sell yoga apparel beyond American borders. Columbia Sportswear, however, is a global behemoth. It knew exactly how to market the booming clothing line internationally. So on the heels of the acquisition and a global product rollout, Columbia Sportswear’s earnings were poised to expand. (Earnings are simply the net profits of a business.) It was a virtual certainty. Again, when the “E” is no longer correct, the stock price must adjust. Allow me to show you how easy this law of the market works… A stock’s P/E simply tells us how much investors are willing to pay per dollar of earnings. High-growth stocks – companies growing earnings – have high P/Es. Low-growth stocks – companies with stagnant earnings – have low P/Es. Let’s say Columbia Sportswear earns $1 per share. If the stock trades for $20, then it has a P/E of 20. ~~~~~~ $20 (stock price) divided by $1 (EPS) equals 20 (P/E) ~~~~~~ But what if Columbia Sportswear suddenly begins earning $2 per share? Well, then its P/E would suddenly be cut in half to 10. ~~~~~~ $20 (stock price) divided by $2 (EPS) equals 10 (P/E) ~~~~~~ Now we have a severe imbalance… Because a stock’s P/E would never decline in the face of higher earnings. If anything, higher earnings would cause Columbia Sportswear’s P/E to increase. Not decrease. So something MUST occur for Columbia Sportswear to regain its true P/E of 20. That “something” can only be one thing… Its stock price must “autocorrect” to $40. ~~~~~~ $40 (stock price) divided by $2 (EPS) equals 20 (P/E) ~~~~~~ See? By moving to $40, Columbia Sportswear has restored its true P/E of 20. You’ll recall that laws of the market dictate that this happen. It can be no other way. In fact, it’s already happened 44 times so far this year. Forty-four companies have announced “upside surprises” on earnings. So the “E” has been wrong 44 times. In every instance, shares have raced higher to adjust. In Columbia Sportswear’s case it only took FOUR days. Newton’s Code predicted how quickly it would happen. Validation came when Columbia Sportswear filed its Earnings Report with the SEC… The report proved everything. It showed that the company had beaten Wall Street expectations on earnings and revenue. Management even raised its outlook for the next quarter. In analyst parlance, we call that a powerful “Triple Beat.” The stock raced higher over four action-packed days. Poster Comment: Sounds like Columbia Sportswear has hit the jackpot on this. Wish I had the bucks to get in on it. ;) Post Comment Private Reply Ignore Thread
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