Isaac's Law

10th May '11 by Isaac

44 comments 23158 reads

I've said it many times on these boards and on TMF. When something goes up a lot in a short space of time, more often then not it is worth selling up and finding the next share that is likely to go up a lot in a short space of time. This principle held true for Dana back in 2008 when it went to £20 on the back of the Rinnes discovery. It went up from £12 to £20 in a matter of weeks, at the time on TMF I was saying Dana got ahead of itself. In fact it never got back to £20 & got taken over.

Rockhopper (LON:RKH) went from approx 50p to £5 in the space of 6 months and now down to about £2.30.

Xcite Energy (LON:XEL) from 50p to £4 in 4 months & now back to £2.40

Caza (LON:CAZA) from 4.5p to 67p in 6 months.

Red Rock (LON:RRR) 6p to 16p in one month and now back to 8p.

Sterling Resources $2 to $4.5 in 6 months & now back to $2.75.

Encore from 15p to 150p in 9 months & back to 95p

Heritage from £1.8- to £6 in 9 months & back to £2.50

It also held true for SOCO International (LON:SIA) when it went from £3 to £6 in 9 months back in 2007.

I can find countless examples of situations where something has gone up a lot in a short space of time and a year or two later it has dropped back.. And pretty much in all those situations you have the same crowd & 'experts' telling you it is going much much higher and have blue sky valuations and all that nonsense.

Sure you won't get that ASOS (LON:ASC) by following Isaac's rule, but an Asos is perhaps one in a billion whereas a drop back like the above is very common. It is not easy to sell up when everyone else around is bullish because it is more comfortable to sit in the same boat with the herd. And I think it is at this point where reading bulletin boards can be costly.

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Lo-Q Share Price (5 years)

Lo-Q plc (AIM: LOQ), the AIM listed provider of virtual queuing systems for theme parks, water parks and major attractions,

At a £50m market cap you are paying for a device that is used by 7 million users around the globe that reduces the frustration of having to wait in the queue at a theme park.

There is clearly a market for this product based on my own experiences & looking at the numbers.

They have done well to grow their cash, revenues and profits every year for the last 5 years.

At a PE of 14, when the stock was trading at a PE as low as 2.9 in 08,4.8 in 09 and 9.2 in 10 the market has clearly re-rated the stock.

With consensus EPS growth of 18th in 2012 and 9% in 2013 the stock looks fairly valued IMO.

After all there is only x number of theme parks & when your product is being used by all these theme parks where would the growth come from?

I don't see the product being used anywhere else, as the product has a win-win from customer/retailer perspective at a theme park, I don't see that in any other scenario.

Time to look for the next LOQ IMO.

Isaac

31st Mar '12

Isaac's law kicking in, it was inevitable. Nothing continues to outperform forever :

2 Year chart. Click to open a chart window

Isaac's Law also kicks in for APPLE IMO. If i was a holder I would be selling here, 50% rise in 3 months. Stock looks overvalued IMO :

The principles are ALWAYS the same, it is the stocks/people that change but the principles always stay the same IMO.

thebuffoon

1st Apr '12

Isaac,

Isaac's Law also kicks in for APPLE IMO. If i was a holder I would be selling here, 50% rise in 3 months. Stock looks overvalued IMO.

As we both know, you have absolutely no idea of the VALUE of Apple, so to say IYO it's overvalued, is wrong. What you mean, is that the price has gone up too much too quickly, so one should sell. Of that you may or may not be right.

By the way, 'Isaac'sLaw' (When something goes up a lot in a short space of time, more often then not it is worth selling up) is a little vague for a law! Perhaps we should call it Isaac's theory..

Actually, would you care to restate it (for those out there who may be interested)?

Buffy

emptyend

Isaac's Law also kicks in for APPLE IMO. If i was a holder I would be selling here, 50% rise in 3 months. Stock looks overvalued IMO

...mmmm

Whilst I wouldn't be so bold as to promulgate a law on the matter, I happen to agree with Isaac about Apple. IMO its stock is discounting a huge continuation of recent good news that seems unlikely to be indefinitely repeatable given their already-large market share.

I would also add that Apple's stock price has a massive influence on US stock indices, both directly and indirectly (by being a bellwether for the tech sector).

The tech sector has had a great run lately on the back of Apple's outperformance - but IMO it seems to be setting up for a fall. In particular, I would point to the situation over patent infringement claims that are continuing between Apple and Samsung and Nokia - Apple has a small number of key patents that, were they to lose a legal case, might require some of their narrow line of products to be withdrawn from sale.

See FT comment here

I could easily see questionmarks being placed against Apple, post-Jobs, if they were to start to run into legal headwinds.

Apple is valued at a market cap of $559bil with a PE ratio of 17 with a price/book ratio of 6.21, it is the largest company in the world.

Compared to Microsoft which is valued at $270bil with a PE ratio of 11.7 and a Pritce/book ratio of 4.22.

Exxon long held the spot of being the largest company in the world currently with a market cap of $408.7 bil, PE ratio of 10.3 & a price/book ratio of 2.65

I don't think it is logical that Apple has an almost 50% greater market cap then Exxon, I also think Apple's PE ratio is artificial as I don't think the earnings are sustainable.

We have had the Ipod, Iphone and Ipad. All great products but what's next to sustain the momentum in earnings?

Steve Job's is no longer around, I don't think Apple have found a credible replacement for him. Can he be replaced? Plus there is LOADS of competition so it will be difficult to maintain margins on these products IMO.

10-15 years ago Microsoft was in Fashion.......Today Apple is HOT....5-10 years from now that may not be the case...

I would be a seller of Apple stock and would look for the next Apple IMO.

kenobi

4th Apr '12

We have had the Ipod, Iphone and Ipad. All great products but what's next to sustain the momentum in earnings?

>> well I don't know what they have in their labs, but I do know that they've been working on TV, and that Steve Jobs said they had cracked it before he died, and that if there is a fantastic system that works well with you ipod/ipad/iphone, there are a lot of people who would pay big bucks for that, (after all they've paid big bucks for the other products), so lets not write them off just yet,

Steve Job's is no longer around, I don't think Apple have found a credible replacement for him.
>> Well I think Johny Ive is Job's spiritual sucessor, but I agree, when someone like jobs disappears, there is a huge risk.

Although generally I agree, I must say I was surprised that they are on a pe of only 17, just goes to show how huge the margins must be on these products.
I would agree that they're not going to go up indefinitely and this might be seen as a good time to realise some value. Although if they launch an iphone 5 in the summer and this knocks the socks off everything in the market then there's a good chance that valuation will increase futher,

oh and one more thing, apple tv's might arrive some time soon,

(sorry couldn't resist)

G

oh and one more thing, apple tv's might arrive some time soon,

As long as they don't stray too far from their core competencies, the share price will move up quite a few pips.

Buffy

6th Apr '12

Time to sell LOQ IMO,

LongbeardRanger

Hmmm. And is their product being used at all theme parks? Or is it still just being used at a relatively small fraction of the theme park market (not to mention the water park one)?

I do share your skepticism about other potential uses (though what about the partnership with Mastercard - what do you make of that?). Perhaps one other possibility is music festivals?

Incidentally 9% EPS growth in 2013 is somewhat conservative IMHO, given the number of new parks in LOQ's stable and the fact that new parks tend only to get to full profitability in year two.

I never implied the product is currently being used in all theme parks, merely the point that there is x number of theme parks and therefore there is a ceiling as to how much revenue can be generated from theme parks. And that is excluding competition.

The product is hardly unique and can be repeated by a viable competitor.

I have also considered it's use at music festivals perhaps even in a hospital, emergency dental or A&E etc etc but the point I highlighted is in both cases there is'nt really a win win.

In a theme park you can queue for a ride and in the interim go onto other rides/shops/zoos etc

Unless the music festival has loads of events going on in one place then where is the win win?

I would certainly be a seller then a buyer at these levels IMO.

marben100

Hi Isaac,

I have only just come to this thread, and I have "recced" it.

I've said it many times on these boards and on TMF. When something goes up a lot in a short space of time, more often then not it is worth selling up and finding the next share that is likely to go up a lot in a short space of time.

There is a grain of truth in what you say, but you beg a couple of questions:

What is "a lot"?
What is "a short space of time"?

I look forward to your answer.

Just as an alternative approach, and illustration of the problems, I'll mention my own trading history on LoQ (all prices net of broker commissions etc).

15/12/08 bought first (small) tranche @ 38.6p thanks to a good presentation organised by Carmensfella
02/03/09 bought 2nd (25% larger) tranche @ 38.5p: new contracts won and good results but share price remained unchanged: good opportunity to top up.
28/04/09 sold 50% @ 65.5p - concerned about bird flu affecting theme park attendances and strong SP rise (in line with "Isaac's Law") [those concerns proved unfounded]
27/01/10 bought 2/3 of those previously sold back @ 74.7p as bird flu fears receded and the stock appeared to be on a P/E of 5 after results.
01/04/10 trimmed 1/3 of my overall holding back @ 116.9p as P/E had risen to ~10 - not so cheap any more, controlling risk.
21/07/10 bought 80% of those sold in April back @ 107.5p after solid interim results
17/02/11 sold 75% of those bought back in my last transaction @ 143.8p results OK but P/E seemed more demanding now
15/07/11 sold another similar sized tranche @ 202.3p to control risk: P/E seemed very demanding now.
24/10/11 bought that tranche back @ 149.9p: better price & trading update expected, which was likely to be positive
12/01/12 sold 2/3 of that tranche @ 197p: risk control again, as the value of my holding had become too large for my comfort
24/01/12 sold another similar sized tranche (to that sold on the 12th) @ 222.7p: further risk control and concern that results could disappoint demanding market expectations
16/03/12 sold yet another tranche of the same size as those sold in January @ 290p: P/E now very demanding.

As the price has continued to soar above 300p, I have contemplated selling further, but when Carmensfella brought the information that I have recently tweeted about ;0) to my attention I decided to hang on to the rest. Readers prepared to do the math ;0) will figure out that I have extracted considerably more cash than I have invested, over time, and still have a holding worth a multiple of my original investment.

Of course, I would have done much better if I had simply hung on to my original investment... but then there's "Isaac's Law". ;0)

LoQ remains one of my most successful investments.

Best,

Mark

BTW Isaac,

The product is hardly unique and can be repeated by a viable competitor.

You're wrong about that. LoQ has strong patents and the technology is cleverer than might first appear (the core behind it is a proprietary mesh wireless system, not just the queueing algorithms). It has and is taking legal action against violators. It has also taken many years of experience for LoQ to learn how to deploy these systems optimally to maximise revenues for the park operator and themselves. In the theme park/water park space there are no realistic independent competitors. It remains to be seen what can be achieved with the Mastercard deal.

Strong revenue/profits growth is pretty much guaranteed over the next few years, as revenues from the mass of newly installed systems builds (it takes some years before customers fully appreciate the benefits of renting a qBOT/wristband and demand builds, in any given park). That's before we even consider likely new contract wins.

Nevertheless, the level of investment risk seems higher at a forward P/E of 20 than it was at 5!

7th Apr '12

Mark,

What is "a lot"?

What is "a short space of time"?

50%+ in 3 months, 800% over 4 years i.e, 200/% per annum.

Where else can you get those returns? Are those returns sustainable in the long term? Can a business continue to outperform for long periods of times?

David recieved 68 recs for his post on LOQ : http://boards.fool.co.uk/warren-does-the-ukbuffet-special--12521641.aspx

Indicates to me there is strong interest from private investors, plus there have been quite a few presentations given to the public.

The problem with capital growth investing is your reliant on others to pay a higher price then you did in order for the share price to keep going up, once you have attracted the attention of most of the audience who is left to buy to take the price higher?

Also a closer look at the numbers.....

Since 2008 Revenue is up 81%, yet the share price is up 800% in the same period.
PBT is up only 45% since 2008, yet the share price is up 800% in the same period.
Did you know the profit after tax is less now then what it was in 2008? Yet the share price is 800% higher. Profit after tax in 2008 was £2.02m but is now £1.94m
EPS was 14.59p in 2009 but in 2011 was 11.54p
NAV per share is 47.77p once you strip out the intangibles vs a share price of 310p
Business is seasonaly weighted towards the 2H - a bird flu type event could impact revenues
Mastercard deal relies on similar source of revenue i.e. theme parks, I don't think this will be a big revenue generator

The way I have understood LOQ's product is it is a device that allows people to queue virtually without going to a ride and when it is their turn they can then go on the ride without having to wait 2-3 hours or so for a popular ride.

They can patent the technology, but the concept remains the same & can be repeated. It is not a Coca Cola.

The company has already been distracted from the day to day by taking legal action against violators, this can be a drag on any business.

Strong revenue/profits growth is pretty much guaranteed over the next few years,

Nothing is guaranteed Mark and we both know it. The fact that the expectation is in the markets it is also to some extent in the price, i'd rather be a seller of optimism then of pessimism.

Quite.

Your a smart investor with lots of good ideas, not convinced you need to Invest in highly rated companies to make money from.

Time will tell whose right, business don't grow in straight lines though.

I know nothing about the physical technology, but it seems to me that it could probably be reproduced with smartphone apps or web pages , even email or txts , so I would be wary of attributing too much value to patents. what they do have is a strong position in a relatively small market. So it's less likely that someone will go into competition with them than in a larger space with bigger rewards.

Marben sounds like you have called this one pretty well overall, so I'm not trying to teach my grandmother to suck eggs, (never understood why such a thing would be useful anyway !)

cheers K

PS what's your twitter name ?

David recieved 68 recs for his post on LOQ

I'm pretty certain the recs are for the April Fools Day comments about Buffet(t)!

Buffy

9th May '12

13th Feb - GKP doubled in 2months, Sell & Buy Soco imo.

Interesting.

16th May '12

Isaac's Law re-iterates Sale.

No point catching a falling knife. Forget the Fundamentals. Buy back after it goes sideways for an extended period and then starts rising taking out the previous low in an upward direction IMO.

Also said sell 31st Mar on this, as close to the top as one can get :

I also expect LOQ to breakdown at somepoint :

21st May '12

I did'nt start this thread backn in 2010 but is it not amazing how the rule that Anything that rises ALOT in a SHORT period of time ev eventually comes back to earth, infact in some cases goes to the basement and even into the graveyard.....

Pdx was up over 200% in 2010 over a 6 month period, around £6.50, today the company sits at 15p. Another thing worth noting is the trend in all thee charts, amazing how over and over and over again the charts show that whatever trend a stock is in it is more likely then not will continue in that direction in the foreseeable.

Pursuit Dynamic Share Price (5 years)

extrader

Hi Isaac,

Ophir(OPHR) has doubled in the last 3 months or so, from 250 to 500p+.

Would you now be a seller ? And, if so, why ? Because of a 'rule' that smacks of 'top-slicing' ?

Don't get me wrong - I'm conceptually happy to get my capital back and run the rest for free - but it seems as though your strategy could result in cutting your winners and- by extension/implication - riding your losers.

I'm not sure that this is the way to happiness.......

ATB
Discl.: No interest in OPHR - or any of the other shares you've referenced (other than ASC.......;->)

24th May '12

Ophir(OPHR) has doubled in the last 3 months or so, from 250 to 500p+.

Would you now be a seller ?

Given that Isaacs ' Law' is as vague as 'If it goes up a lot in a short space of time. sell it', I wouldn't expect a definitive answer on that!

Buffy

Isaac's Law

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Isaac

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