My ALGN mistake

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1

I have owned ALGN for awhile now. I think it’s a leader in its market, has good management, has most everything I want in companies I own.

However, I should have sold before this earnings. I should have seen the “bad” report coming. I don’t know what an earning report is going to be, but in this case, the odds were not in my favor.

Let me explain:

ALGN rev. growth rate (%)

2014 18 18 15 11
2015 10 9 9 16
2016 21 29 34 27
2017 30 32 38 44
2018 41 38 31

And in my opinion, the reason the stock just got crushed was their forecast for next quarter of 20 to 22% revenue growth.

So if you look at the revenue growth this year we have, 41---->38–>31—> forecast of 22.

Looks bad.

If you look at the previous 4 quarters heading into this one, and average the last 2 years we get:

(34+38)/2=36%
(27+44)/2=35.5%
(30+41)/2= 35.5%
(32+38)/2= 35%

and this quarter

(38+31)/2 = 34.5%

and the 4Q, forecast at 22%, but I will use 24%, because they always beat by a few %.

(44+24)/2 = 34%

So what I missed is the tough comparison the year before of 44% for next Q, so most likely they were going to forecast in the low 20’s because they are trending around a 2 year average of 34-36%.

The reason I should have caught this, is because the exact same thing just happened in ANET. Stock gets beat up because it appears the growth is slowing, but it’s most likely just tough comparisons the year before.

My theory is, with most stocks being traded by robo traders, looking at the numbers, any company that looks to be slowing from (growth rates) from 41 to 38 to 31, and a forecast of 20-22, is going to get crushed. The market is not looking at the year before comparisons.

I should have caught this before hand, and sold knowing the odds are not in my favor.

Jim
Thanks for listening, I feel better.

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Jim, by what you’re saying they’re going to forecast mid twenties for q1 as well and the stock will sell off again.

3

We always explain in hindsight. The scanner part grew by 79%. That was not in the cards but the invisialign did meet though comparisons and growth declined a tad. But you had not way of knowing where that would come in, and the reaction to this bit of miss was largely down. The large reaction might indicate that the market was looking for an upside even after the build up over the months but were surprised by that miss. Certainly contrary expectations do exist but in some case that belief is not strong enough to act. Looking at past numbers and trying to extrapolate or estimating probabilities on are not something you can do with any degree of reliability. You just don’t know what side of the fence it will fall. Flip the coin.

No, you would not have known to do anything. It would just be luck if the outcome were to be favorable on your account.

tj

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Hi 12x-

I’m not saying I know for sure what they are going to forecast.

I’m saying I see a trend, and if the business doesn’t materially change because of new markets, or new competitors, etc, and the trend holds, then the odds are favorable they would forecast in the mid 20’s.

Let’s say they come in next Q at 24% (probably pretty close from their forecast of 20-22 and they typically beat by a little). Then forecast mid 20’s like we are talking about.

That gives us a growth rate (in %) of the last 4 Quarters:

38–31–24—(forecast of 25%).

I don’t know how the market would react, but my guess is the stock wouldn’t sell off, because the trend is no longer down, its up from the last quarter, and I think the market is shortsighted right now and looking at the quarterly growth trends.

Now of course there could be something said in the conference call, or a new competitor, or lot’s of other things that could make the stock sell off.

Jim

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Now of course there could be something said in the conference call, or a new competitor, or lot’s of other things that could make the stock sell off.

Did any of you listen to the CC or read the transcript? If you did you would have a much better idea of what they are likely to project next quarter and the reason why.

https://discussion.fool.com/three-items-grew-faster-than-revenue…

Denny Schlesinger

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