Distinction: A turn-around vs. A sold-off stock

The difference between a turn-around and a stock that has been sold off is a very important distinction, and it’s important to understand the distinction. It’s not at all the same animal. To quote Jebbo’s paraphrase of Warren Buffet: “To our experience turnarounds usually don’t turn.”

When I refer to a stock that’s been sold off, I’m referring, for example, to one of our high growth companies that:
Is doing everything right, and
Is growing like mad and reporting great results, and
In the conference call management is very enthusiastic and says “The world is our oyster!” or words to that effect.

But that sells off because the market feels that:
70% growth isn’t enough, or
They didn’t raise guidance enough
The stock price is too high (and maybe it actually is)
Or something like that.

Some recent examples are Twilio and Elastic, both of which dropped temporarily after announcing great results. Stocks almost always recover from this kind of sell-off quickly and completely, because there is nothing wrong with the business in the first place.

An old, and VERY extreme example was Amazon in 2000, which dropped from maybe 200 times revenue to maybe 10 or 20 times revenue, but whose business was always doing great and growing like mad. The price was WAY too high, because it got caught up in the monster bubble of all time, which meant that it lost a huge amount of its market cap. I only remember that one Bubble being that big in my lifetime, which has been long. That wasn’t a turn-around though, as there was no problem to turn around except the stock price. It’s now about 300 times (not 300%!) of its low price in 2000 or 2001.

When I refer to a company that’s a possible turn around, I’m referring to a company that is broken in some way:
Their business has fallen off drastically
They are losing too much money and there is no path to profitability
Management has messed up the business
There is something wrong with the business

It has sold off for a good reason, a good business reason, and this kind of company doesn’t come back quickly, or easily, and often not at all.

Some examples:

Westport, which I have mentioned in an earlier post, was losing so much money each quarter that it would have had to quintuple revenue to get just to breakeven, much less make a profit. Management was guiding to revenue up 15%!, a bit below the 400% rise that they needed. They didn’t make the 15%, it so happens. This was a structural problem. They needed a whole new business model to turn around.

Chipotle, which had a very well publicized problem with food poisoning, which was fairly widespread at first as I remember, and kept recurring in minor outbreaks, and totally undermined consumer confidence, and caused a huge drop off in sales. It’s taken them over four years to “almost” turn around. This was a revenue drop-off problem, and they needed a lot of time for people to forget about the food poisoning.

Nutanix, was changing their entire business model, TWICE, at the same time, changing from a hardware company to a software company, and then deciding to try to change from a software licensing company to a SaaS company as well, AT THE SAME TIME, and with a bunch of sophisticated products, complex enough that it was difficult for mere mortals like us to figure out even what the company was actually doing, and then on top of that, management totally screwed up sales and marketing, so that it became a disaster. That’s not a set of problems that will resolve overnight. It has nothing to do with a sell-off like Twilio’s or Elastic’s, when the market was dissatisfied with 70% growth.

I hope that that distinction will be clear and useful to you.

Saul

A link to the Knowledgebase for this board is at the top of the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”

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“Chipotle, which had a very well publicized problem with food poisoning, which was fairly widespread at first as I remember, and kept recurring in minor outbreaks, and totally undermined consumer confidence, and caused a huge drop off in sales. It’s taken them over four years to “almost” turn around. This was a revenue drop-off problem, and they needed a lot of time for people to forget about the food poisoning.”

But at some point in that 4 year window there was a great opportunity to buy shares in CMG. The turnaround did take quite a long time, an eternity to some investors. To others like Tom E. the selloff created at some point a very nice place to enter the stock and ride it to a double as the risk reward changed.

At some point, maybe now at 33, or back down to lows of the mid to low 20s, NTNX may become a good buy and hold. Most wont wait around, but I cannot fault anyone for continuing to analyze the situation and holding onto shares at this point.

Not every single investment can do everything right 100% of the time. NTNX screwed up, the bar is as low as it can go now. They either start to get their act together in the next few months, or they are inept.

As someone else pointed out here or on another board, Monster Beverage turned a 10k investment into 10 million bucks along its more then decade long run, but along that way they screwed up many times and the stock price was a wild bronco ride up and down all along the way. There were dozens of reasons along the way to sell the stock and I’m sure the vast majority did during some point of its highly volatile run.
Oh but the few that held, they held onto the number one performing publicly traded company in the world for that long run.

I’ll give NTNX management one quarter to show improvement.

Chris

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what about AYX? would you say that same thing?