Revisiting Two Of 2015’s Biggest Turkeys — Bret Jensen
The Biotech Forum is a compelling investment service of stock market analysis for investing in biotech stocks.biotechforumsa.com
I hope everyone had a marvelous Thanksgiving feast that was multiples better than the fare the NFL served up yesterday for the most part. Today I want to touch on a subject that is rarely broached on SeekingAlpha or other financial sites. This is how important it is to avoid putting landmines within your portfolio. 95% of the articles here, on CNBC, MarketWatch, etc….deal with what stocks or sectors to buy now.
However, passing on individual stocks or sectors can be just as important to portfolio performance as what you put in your portfolio. Sometimes it is hard to avoid blowups. Such as having a small biotech whose primary drug candidate fails in trials, which is why one must take a “Shotgun Investing” approach in this lucrative and volatile areas. This is one of the core tenets of the Biotech Forum portfolio which has allowed it to easily best its benchmark in 2015.
Sometimes stocks across a whole sector fall in tandem. Anyone that was equal or over weight energy or commodity sectors to begin 2015 knows how painful that can be. Today I want to revisit two of the biggest “Turkeys” in 2015 to glean what lessons we can from these painful implosions and hopefully apply them to sidestep future losses. Both I think were easily avoidable.
Let’s start with the saga of El Pollo Loco (NASDAQ:LOCO) which came public in August of 2014 and was initially priced at $15.00 a share but soon shot up to north of $35.00 a share. As I noted at the time, one had to be “Loco” to buy this stock at these levels.
I am always amazed on how frenzied buying can be for the latest “fad” restaurant concept. This is a notoriously low margin business with a high failure rate. That doesn’t stop investors from bidding up these stocks to ridiculous levels. Shake Shack (NYSE:SHAK) at one point was valued at $50 million per existing restaurant. The stock has been more cut in half but is hardly the bargain at more than 100 times forward earnings.
I just avoid this sector of the IPO market altogether, lots of times if you like the restaurant and concept you can come back 12–18 months after the IPO pop and buy the stock for 30 to 50 cents on the dollar. For every major winner like Chipotle Mexican Grille (NYSE:CMG), there will myriad losers like Potbelly (NASDAQ:PBPB) or Noodles (NASDAQ:NDLS)
Next let’s discuss GoPro (NASDAQ:GPRO), one of the hottest IPO’s of 2014 that saw an initial surge of almost 150% to $100.00 a share. At one time this company had a market capitalization of north of $6 billion, despite being a one trick pony. Pundits were opining that the company would successfully branch out with new offerings in the space and had the potential to develop its own video channel based on the output of the people who bought its cameras.
I had this as one of my three stocks to avoid for Investors Alley at the beginning of this year. In addition to sky high multiples, GoPro faced coming competition from low cost Asian competitors. It also did not have a huge ecosystem or moat that could stave off competitors ala Apple (NASDAQ:AAPL). And adding substantial value to its market capitalization based on some video offering in the future just seemed to be folly. GoPro makes a nice product, but hardware is a low margin business which investors should have kept in mind instead of getting caught up in the initial frenzy for this stock.
I hope none of my followers took hits on either of these Turkeys. However, learning from these types of mistakes can help avoid making the same ones in the future. I have found that to be one of the best ways to improve portfolio performance over decades of investing in the markets. That is my take for this Friday.
Thank You & Happy Hunting
Founder, Biotech Forum
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
For more information on Bret’s core investing strategy that is hugely successful in the lucrative biotech sector, consider Bret Jensen’s exclusive investment service, The Biotech Forum on Seeking Alpha.
Originally published at seekingalpha.com.