Nothing keeps you humble like investing in stocks. On Wall Street, the road is paved with good intentions – and spectacular falls from grace. With WeWork, investors never even had the chance to buy stock! Once valued at $47 billion, WeWork was supposed to be among the hottest IPOs of 2019. Then once potential investors got a peek at its financials, they saw that the coworking real-estate company was bleeding cash. Before long, WeWork’s hard-partying CEO got the boot, and the IPO was yanked off the docket entirely.
That’s just the most salient, recent example. But I’m sure we all remember the first time we found an exciting company, only to see it fall into a hole (or off a cliff). Or the first time we took profits off the table but had to stop the self-congratulations when the stock went even higher…without us.
That being the case, I’ve found it’s best to take your ego – and especially your emotions – out of the equation entirely. By writing stock-picking algorithms, then using those formulas to screen every single investment prior to purchase, I sleep better at night. And, frankly, I make better gains.
Along the way, I’m happy to say, my system has steered me clear of all the most common pitfalls of “emotional investing.”
All week, I’ve been reviewing the most common biases, traps and mistakes that can torpedo your portfolio in my Peak Performance Series at Market360. I’m wrapping that up today with one final thought:
In the current crop of IPOs, some of the biggest “media darlings” have turned out to be the biggest losers, thus far.
If you were surprised by that, I’d respectfully point out that the reason is right in front of us.
When the media is hyping up a stock, sometimes you’ve got to switch off the TV, put down your phone, or bypass the article. It’s all too easy to be swept up in a “great” story. But with an IPO, the story is all about the bright futures and great potential of these companies…rather than real facts and trends – the proven precursors of a successful investment. In short, it’s just too early to invest in these things.
And Wall Street is starting to wise up to that.
As a group, recent IPOs – as reflected in the Renaissance IPO ETF (IPO) – are down 15% from their peak in late July. The IPO ETF frequently runs into trouble, but it’d had a great run all year, until it was dragged down by the likes of Spotify (SPOT). A 2018 issue, Spotify is down 30% from its IPO price.
Things weren’t quite so dire for SPOT as recently as this summer. But when you subject it to the eight-point formula behind my stock-picking system, Spotify just doesn’t measure up.
For example, while Spotify did achieve profitability in February, its earnings growth just isn’t strong enough to tempt me. Nor are its operating margins. Its Earnings Momentum is downright dismal. No wonder investors are fleeing, as demonstrated by my proprietary Quantitative Grade, for which SPOT earns an “F.”
Well, if investors had looked past the emotional appeal of a popular music-streaming company in its early days, they’d have stayed far away from SPOT.
Earnings were also the culprit for Beyond Meat’s (BYND) recent fall from grace.
As soon as it IPO’d in May, BYND seemed like it could do no wrong. If anyone doubted the fake-meat company, its fans could point to its 284% gain a month after the IPO. Or its 496% gain after two months…or its 840% gain by late July.
All along, many BYND investors must have felt invincible. This is the classic Recency Bias we touched on yesterday. Since its peak, BYND’s gains have been cut in half. And the trouble began with Beyond Meat’s second-quarter report.
Wall Street analysts were expecting a modest loss of $0.08 per share for BYND’s second quarter. But BYND lost $0.24 per share. It just goes to show the value in holding out for a proven profit engine.
Cool stocks are fun to chat about with your friends. But successful investments aren’t always “cool.” The stocks we’ll use in Project Mastermind might not be. However, I do see the potential for 100%, 200% and even 500% gains.
That’s not to say that Spotify, Beyond Meat (or, heck, even WeWork) might not make 500% in their day. I have my doubts, sure. So for now, I’m staying away.
All that said, it’s not hard to understand why so many investors like IPOs: They want to get in on the ground floor of a stock that could skyrocket. Maybe in a few years, once they’ve established real revenue and profits, some of their stocks will double or triple, or more.
However, the stocks I’m looking at appear likely to deliver those gains in months instead of years. And without taking extraordinary risks.
I hope you enjoyed our Peak Performance Series, and you’re ready to banish the most pernicious biases from your investing. I’ve got my eye on the upcoming earnings season, and I’ll be back with more on that topic soon. In the meantime, if you missed my Project Mastermind presentation, click here to learn more and get in on the action.