What a difference six weeks can make in the crazy world of stocks. Wall Street hammered Vonage (VG) by 16% in a single day last month, but the VoIP giant has since rebounded by some 32% -- a good lesson for value investors.
VG's shares sank to a 16-month low on May 5 when the company unexpectedly announced a $230 million acquisition of Nexmo, a so-called "Communication Platform as a Service" company (or CPaaS).
The news came mixed in with a 66.7% earnings surprise -- 10 cents per share vs. analysts' six-cent consensus -- but the Nexmo-Vonage deal completely overshadowed those impressive results. After all, Wall Street hates uncertainty, but that's exactly what Vonage delivered with its out-of-the-blue Nexmo news.
VG made very clear what it was paying for the firm, but not what it was getting in return for taking on the additional debt that the deal will require. This uncertainty prompted investors to give Vonage a huge one-day haircut.
But fast forward six weeks and Vonage has rallied back to levels not seen since March. This resurgence is easy to explain, but still part of what makes markets and investor behavior so fascinating to me.
In my opinion, VG's rebound actually has two elements to it. First, there's the realization that Wall Street might have overreacted to the Nexmo news. Vonage actually fell an additional 5% in the week following the announcement, but rose 22% over the next month as investors began to shake off their initial surprise.
Then, Citigroup last week upgraded Vonage to "Buy" from a previous "Neutral" and substantially boosted the stock's target price to $8 a share from an earlier $4.75. This apparent blessing of the Nexmo acquisition put investors even more at ease with both the transaction and Vonage's decision to move into the CPaaS segment in a big way.
As a result, VG rose some 15% the just four trading sessions, including heavy volume and a 13% gain on Tuesday after Citi upgraded the stock. (Volume that day totaled 3.5x Vonage's three-month daily average.)
Add it all up and Vonage has soared even though nothing has truly changed since the company's earnings announcement six weeks ago. There's no new earnings report or additional company information, just a growing comfort that the Nexmo deal might be a winner after all. VG is still the same firm, just with a different Wall Street interpretation.
The Bottom Line
The ability to spot and take advantage of negative market overreactions like Vonage's May 5 sell-off can help value investors drive their returns higher.
If you can spot such opportunities and have the stomach to execute on them before some analyst makes headlines with an upgrade, your portfolio should definitely prosper!