It happens. Good news for a company is followed by bad news for its stock. Welcome to the wild and weird world of investing in small companies. GigOptix announced profits and record revenues on impressive growth and the stock, GIG, went down. Investing in small companies is a fickle thing; which is why many investors are chased away, and why there are many opportunities for investors and speculators that have a high risk tolerance. It certainly isn’t fun and easy, though.

If you want more background on GigOptix, dive into some of my previous posts. GigOptix is the geekiest of my investments, so don’t be surprised if the jargon gets to be too much. The short version is that GigOptix makes the switches that make high-speed Internet very high speed, and as speeds increase, their competitive advantage increases, too. For a business in a growing market, shedding competitors while gaining customers is a good and profitable thing. What could go wrong?

For years, GigOptix has grown its product line by acquiring other small companies doing similar work. Until recently, the company was so small that some American houses cost more. But then, some houses are ridiculously priced. I ended up with GIG stock because MicroVision spun off Lumera, and Lumera was bought by GigOptix. As GigOptix has progressed, I’ve bought more stock. The stock has been cheap, the potential has been increasing, and lately the company and the stock have been realizing some of their potential.

Within the last year, GIG has been as low as $1.12, back when it was slightly unprofitable but growing. Within the last few months it hit a high of $3.42; a nice triple. Then, the earnings report came out. Even at $3.42, I thought the stock was undervalued. A good report should send it higher; especially as the market cap crested $100M, a key criterion for some investors. I didn’t agonize over it, or wake up early or stay up later to read the report. The market would do what the market would do.

After the report was released, the stock fell. Currently it is down over 25%. With that kind of bad news I avoided reading the details of the earnings report because there were other things to do in my life, and I had control over them. The stock continued to fall until it hit a low of about $1.95, before recovering a little.

It’s Friday evening. I’ve got my vodka tonic. I finally opened the earnings report.

• Company revenues were up 23%.
• Net income rose from a loss of $0.18 per share to a profit of $0.03 per share.
• Gross margins increased by 5% points.
• The company has $30M in cash.
• The company expects to grow about 14% this year.

They tend to underpredict and overperform, so GigOptix has become a viable, profitable, growth company in a growth industry.

So, where’s the bad news that sent the stock down?

It doesn’t take much to shift the stock price of a small company. There are far fewer shares and far fewer investors. At a glance, it looks like one major investor decided to sell their shares. Without an equally large investor trying to buy at the same time, supply and demand make the price drop. The next question to ask is, “why did they sell?” It might have nothing to do with the absolute value of the company or the stock, and more to do with the relative value of some other company or stock that they needed the funds for. A big sell could also be because the investor’s investors wanted to get out of the stock market and into cash. Considering the global markets, that is a likely scenario. Someone with more time to spend on the markets may be able to dive deeper. I simplify my life by focusing on the company’s fundamentals.

GigOptix just proved to me that my previous analyses were accurate enough. Even with the drop, the stock is up 85% from a year ago. It is down an embarrassing amount from my 2005 purchases of LMRA, but has returned to breakeven for my purchases of GIG. If I thought it was a good buy then, logic suggests that it is a better buy now.

I will not, however, be buying. Any spare cash I have now is directed towards home maintenance, car repair, taxes, and – well – years of Dammed Plans. Maybe, maybe I could set aside enough for a hundred shares or so, but that wouldn’t dramatically improve my position. The smallest of their competitors are four times their size. Most of their competitors are twenty times their size. That’s sufficient upside potential for optimism.

Maybe there’s some industry news that undermines GigOptix’s competitive advantage. That’s the nature of business and technology. Even in such a situation, however, the markets are frequently large enough to have room for the new and the old. GigOptix is probably disrupting some competitors, and the same can happen to them. If, however, the price drop was merely the shifting of some institution’s portfolio, then the good news can be bought at a lower price.

In any case, GIG is an example of why investing in small companies is not for everyone. I’ve seen this happen often enough that I am not surprised, even though I was disappointed. (For more about my investing history, read my book, Dream. Invest. Live.) Except in a few situations (DNDN), the good news is eventually reflected in the stock price. For stockholders, that means the best move can be to be patient. The fickle actions of others shouldn’t be a reason to mimic them – unless, the real reason turns out not to be fickle. Every investor should have access to the same information, at least according to the law, so if you’re curious, dive into the SEC filings and company announcements, and make up your mind. You’re welcomed and encouraged to share your thoughts here, or even better on discussion boards like Investor Village. Maybe I’ll see you there.

In the meantime, time to put investing aside and get back to living.