Stocks & Markets January 28, 2010, 8:17PM EST

Investing: Finding the Next iPod

Investing pros explain why exploiting hit products is so difficult—and how to spot a company that does it right

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The new iPad tablet device from Apple Inc. (AAPL), introduced by the company's CEO Steve Jobs on Jan. 27, has Wall Street speculating what the new offering means for the company's bottom line and how competitors will respond.

Investors are right to pay attention: Nothing moves a stock like the excitement surrounding a new product. (Apple's shares, which advanced 134% since Mar. 9, 2009, closed 1.4% higher on Jan. 27—the day the iPad was unveiled—but fell 4.1% on Jan. 28.)

But this can be a dangerous game for investors. The stock market's enthusiasm rarely lasts long. Stocks fueled by wildly popular products can rocket higher, then collapse suddenly when anything goes wrong.

Apple has held on to stock gains since its iPod was first introduced in 2001, but other companies haven't sustained Wall Street's enthusiasm. Popular products like Motorola's (MOT) RAZR phone and Nintendo's (7974:JP) Wii video game console pushed stocks higher initially, but both companies now trade below their prices when the products were unveiled.

Sometimes the market moves are especially wild. Crocs (CROX) saw its stock rise 423% in the 20 months after its 2006 initial public offering, but then the footwear company lost 90% of its value in the next nine months as the popularity of its Crocs shoes waned.

Investors have to ask: Will a new product be a Cabbage Patch Kid—the must-have doll that briefly made Coleco a Wall Street darling back in the 1980s, before a foray into computers helped send the stock into oblivion—or a long-term franchise like 3M Corp.'s (MMM) Post-it Notes?

Prediction Game

The first task, investing experts say, is predicting which new products will be successful.

"Get out and talk to people who are using the product and see what they like about it," advises Richard Parower, manager of Seligman Investments' Global Technology Fund (SHGTX). For products aimed at businesses, you'll need more technical expertise, he says: The opinion of the man on the street won't matter for enterprise software, for example.

Wall Street has a long history of regrets about companies and products that looked promising but flopped, warns Brett D'Arcy, chief investment officer at CBIZ Wealth Management (CBZ). In advance, "it's very difficult to tell," he says.

Investors need to put themselves in the shoes of the customers of the future. If everyone already agrees a product is groundbreaking and innovative, it's too late for investors, says Paul Sutherland, president and chief investment officer of Financial & Investment Management Group. "You don't want to own what looks good now," he says. You want to own what will be hot "five years from now."

Even the most innovative product doesn't guarantee profits for investors, especially because creative, visionary executives are rarely equipped to handle the problems that rapid growth can cause. Coming up with a hit product is one thing. Profitably manufacturing, marketing, and distributing it is another.