Today we would like to examine a high flying stock to drive home the point that the quality of the stock doesn’t matter.  What matters is to catch the stocks entering the dynamic advancing phase to make a sizable gain in a relatively short period of time.  The so-called high quality stocks have cycle too, and once they turn negative, they will cause you just as much financial heartache.

Let’s take a closer look at $AAOI.  Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, lasers, transmitters and transceivers, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to Internet data center operators, CATV and telecommunications equipment manufacturers, and Internet service providers through its direct and indirect sales channels worldwide. Applied Optoelectronics, Inc. was founded in 1997 and is headquartered in Sugar Land, Texas.

$AAOI went public at $10 per share in September 2013 with 200 million market cap.  It was an unknown, obscure small cap stock.  It made a high @ 28.01 in March 2014.  Then all of sudden it broke out the old resistance in January 2017 with very impressive volume.  Because the breakout caused it to enter a virgin price territory, it became a runaway stock.  It rose to 103.41 in July 2017, that was a sizable gain of 269% ( 28.01 to 103.41).

On August 4th, 2017 during its earnings conference call, it announced that AAOI’s biggest customer was going to make the product 40G receivers themselves.  Despite AAOI’s earnings beat, it lost 34% overnight.  The market had such high hopes for AAOI because AAOI’s biggest customer is AMAZON.  It rewarded AAOI stock with 269% gain in six months.  As soon as the market found out AMAZON will make the products, the one and only reason why AAOI was hot, the market turned on a dime.  It sold off 34% overnight.

Lessons learned:

  1. It is appropriate to buy small cap obscure stock as long as it has the right conditions to qualify as a breakout stock that enters the dynamic advancing phase.
  2. Seldom you will find this kind of gains in a large or mega cap stock in six months.
  3. The need of setting stop loss orders.  In the AAOI case, the stoploss order should have been set @ 85.62. So you didn’t get out at 103.41 at top, but if you had gotten out at 85.62, you would still have a very impressive gain of 206% gain in six months.
  4. Every stock is subject to sudden price change.  Recently even the very defensive stock MO had dropped significantly over the FDA regulation news.

AAOI’s rise of over 200% in six months is its day in the market.  We believe its day in the market is over.  AAOI is a one trick pony.  Now it’s time to look for another runaway stock like AAOI.