Nov 23, 2021
Why I Continue To Buy My Three Stocks That Have Lost 50% Of Their Initial Value
Instead of focusing on short-term setbacks, focus on long-term potentials.
Many bloggers like me, sharing their investment journey, focus on sharing their successes; however, very few talk about their decisions that didn't convert into success stories. In this article, I want to share my three stocks that didn't perform as I initially expected and what I plan to do with them.
#1 Stock that is 40% down
The first stock that has tanked more than 40% since I bought it is Appian. Before I discuss how bad it is, let me give you some context. First, whenever I buy a stock, I form a story or a hypothesis on why I should invest in this business. And if the hypothesis I came up with is attractive enough for me, I invest in the business. Second, I am playing a long-term game where I am not interested and bothered by short-term movements. Instead, I am more interested in how things may look ten years down the line. Therefore my hypothesis is based on a long-term view instead of short term.
With that said, let's look at my hypothesis for investing in Appian. Appian is trying to solve the problem of the inability of small to mid-size businesses to develop apps customized to their specific use case because they lack resources. This results in companies doing things manually or stuck with what is available in the market, which usually does not fulfill all their requirements.
This is where Appian's low code App development platform comes into the picture. Its platform enables companies to build customized apps with minimum effort and low cost. And the product is a success, which reflects in Appian's increasing customer base and revenue. On top of it, industries are digitalizing the way they work, which presents excellent opportunities and a growing market to Appian.
Although Appian's stock price is 70% down from its all-time high at the time of writing this article, its revenue is increasing each year and quarter. In addition, its subscription retention rate is 117%, which mean existing customers are spending 17% more on their subscription. And on top of it, the market that Appian is addressing is worth $30 billion and is growing.
You must be wondering if the company is so great, why the stock prices are 70% down. Well, that's how markets behave. Investors get greedy or overly optimistic about a company's prospects and continue to buy at insane price levels. Then, later when the company cannot meet the growth expectations, they start to sell it. Nothing new; it has happened in the past and will continue to occur in the future. Important here is that Appian is still a great company growing steadily, and nothing has changed about its business. And if I was happy to buy it at a price higher than today, then today's price makes it even more attractive.
In short, if my original hypothesis is still valid, stocks sell-offs offer an opportunity to buy my favorite stocks at a better price. And I prefer to buy stocks at a better price, if not at best.
#2 Stock that is 54% down
My second stock that is 54% down from when I bought it is Invitae. Invitae provides genetic testing solutions, which millions of its users have already used. Although genetic testing is still new; however, it has already proved its benefits in identifying diseases at an early stage. Unfortunately, as valuable as it is, the infrastructure required to make it available to everyone at an affordable cost does not exist at this date. This is where Invitae comes into the picture with a mission to make genetic testing available to the general public at a low cost.
Invitae offers an easy-to-access online service that lets people spend as little as $99 for prenatal screenings or $250 for diagnostic testing to identify inherited diseases. In addition, Invitae is expanding its product portfolio by R&D and strategic acquisitions. So far, Invitae has made twelve acquisitions and recently brought Medneon and Ciitizen under its umbrella to strengthen its IT infrastructure, improve its platform, and expand its services to its customers.
Consistently increasing revenue and volume proves that the product Invitae provides is gaining traction and has proved its worth. Not only that, the market in which Invitae is working is worth $155 billion, and it is considering only the US market.
Continuous research and scaling have also helped the company bring down its products' costs, as seen in the image. So, in short, on the one hand, the company's revenue, profit margin, customer base, and product portfolio is growing. But, on the other hand, its stock price is going down. As funny as it may seem, this is how it is.
As I mentioned earlier, history proves that the two primary emotions of people that drive the market's direction are greed and fear. People's greed pushes the stock price to insane levels, as we see with Tesla, Rivian, and many other companies. And, at the same time, their fear brings the stock price down as fast as it moves up. Therefore, Invitae stock price being 70% down from its all-time high is no surprise and was long due. But, as I said, if I was happy to buy it at its all-time high, I am more than happy to buy it when it's 70% down or available at a 70% Black Friday sale.
To conclude, my initial hypothesis for this company still holds, which means I will not sell this stock and consider adding more to my existing positions. However, I do one more thing with my stocks in the red territory, which I will discuss at the end of this article. First, let's look at my third stock that is 38% down since I first bought it.
#3 Stock that is 38% down
The third stock that I am talking about is Lemonade. Lemonade is an insurance tech company that uses AI to offer the best insurance offers to its customers. It makes it easy for people looking for insurance to find the best and cheapest coverage using technology. In addition, it reduces the number of steps it takes to get insurance, improves trust, which many people do not have in insurance companies.
As you can see in the image, customers choosing Lemonade as an insurance company are increasing. In addition, the premium per customer is also growing, which means its customers are renewing their insurance policies and opting for other insurance products offered by Lemonade.
Lemonade currently offers its services in four countries, including USA and Germany, and planning to enter new markets. Not only this, it's continuously expanding its product offerings by in-house research and strategic acquisitions. For example, it recently acquired Metromile, one of the largest usage-based auto insurers in the world to enter into Auto insurance.
This tech insurer has grown rapidly from being a startup to a $3.15 billion publicly-traded company in six short years. Lemonade started by offering renters insurance and added pet insurance to its product portfolio soon after. Then, early this year, it started selling life insurance and now auto insurance. With good leadership and a focused approach, this company has bright prospects. And investors know it, which resulted in high volatility and some big swings in its stock price. However, with its stock price 73% down from its all-time high and closer to its IPO price, it offers new and existing investors a unique opportunity to consider investing in this company.
To conclude, my philosophy stays the same; if my initial hypothesis still holds, I will consider buying or adding more to my current position.
Time to make lemonade out of lemons
It's time to share how I make lemonade out of lemons. So in the situation when my stocks are down, and the end of the year is near. What can I do to make some money still? Here is what I do. First, I sell them to book loss. Then, I deduct the loss from my profits, allowing me to save tax on my capital gains. I do this because, unlike the United States, in Germany, you have to pay tax on your capital gains irrespective of how long you hold your investments. Therefore, it is beneficial to sell the stocks in the red territory to realize the loss and save tax. Then, of course, if my initial hypothesis still holds, I buy the stocks I sold again.
This is how I look at stocks that have not moved in the direction I initially expected them to; however, the business behind it is healthy and growing steadily. What do you do with your stocks that went down because of market sentiments?
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