3 Post-Earning Outlooks for Top Movers: Costco Wholesale Corporation (COST), iRobot Corporation (IRBT), BioScrip Inc. (BIOS)

Overvalued Stock with Minimum Fundamental Growth Creates Value Trap

iRobot Corporation (NASDAQ:IRBT) saw a 5.19% rise on Monday after the company issued slightly higher guidance for Q1. The company is now expecting Q1 revenue between $102 million and $104 million (up $2 million from prior guidance) and EPS between $0.16 and $0.20. To me, the revenue is important with this company, because iRobot Corporation (NASDAQ:IRBT) is a near zero growth company coming off a bad year. In Q1 I was looking for measureable upside and growth, but instead we get 5% growth guidance.

In my opinion, this is not a value stock and the upside is very limited. The stock trades at 39 times earnings and has a price/sales ratio of 1.45. With the stock trading in the consumer cyclical space, I view these metrics to be too expensive and would not buy a near zero growth company at this price.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino), with one scenario being earnings. For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain.

Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the performance of the quarter. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns.

The article 3 Post-Earning Outlooks for Top Movers originally appeared on Fool.com and is written by Brian Nichols.

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