On XPO and the life cycle of story stocks
There was a lot of discussion on the XPO board about “Why the drop?” so I paraphrased what I had written in an earlier post on this board:
I bought XPO some time back as a great little story stock, based on all the success Jacobs had in the past. However, after they bought Norbert some months back, I felt that they were now big enough that they would start getting valued as a real company (you know… with earnings, PE ratios, cash flow, that sort of thing), and that continuing going along losing money wasn’t going to cut it. They had been as high as $50.50 and I sold just a little later at $48. I guess my thinking was correct as they are now at $29.75. (That’s the same thing that happened to the 3D printing stocks, WPRT, and all the rest. They were great stories, but people started asking “Where’s the profits?” (for those who like the old slang: “Where’s the bacon?”)). That doesn’t mean XPO won’t pull it out, but they won’t be getting a free ride any longer. They’ll be evaluated on the same scales as everyone else.
Alex on the XPO board pointed out that I had previously written (some time ago) the following:
I know XPO’s still not profitable but I believe it will be very soon. You’ll wonder why I’m so enthusiastic about XPO, when they still have losses. First, they are growing incredibly quickly. Second, their loss this quarter was $10 million but their Gross Revenue was over $700 million, or 70 times their losses. The loss was roughly 1.4% of revenue, and easily overcome. That’s a completely different ballgame than WPRT where losses were well over 130% of revenue (as I remember). That’s almost 100 times as much loss proportionally.
Well, those were indeed the reasons that I was willing to invest in XPO in spite of its losses. XPO was exciting. But you see, I bought into it eleven months ago, under the mistaken perception that it would soon be profitable. I wrote that the losses would be “easily overcome”. I thought it would happen in the next quarter, or at most, the quarter after that. That didn’t turn out to be what happened. As it got to be to a great big company, after huge acquisitions and subsequent huge debt, and still losing money, I started to think that it’s going to take a heck of a lot to turn this mammoth ship around. I had originally been hoping that they’d easily cross the line and make five cents in the next quarter for starters. But now, just becoming profitable at 5 or 10 cents a quarter, giving them a PE of 100 or 125 or 150, wasn’t going to hack it for a huge logistics and trucking company that’s no longer a little kid that can grow like mad. That’s what I meant when I said it would be judged like normal businesses.
I guess what I’m trying to say is that I’ve read (and observed) that story stocks have a life cycle. When they are just a little company with an exciting story, they are a lot of fun. There’s a load of excitement around them. People will excuse their lacks because the story is so interesting. They go up like mad. But then comes a point when they start to be measured as a real company, on the basis of how they are actually doing, instead of on the basis of how great the story is. I felt that XPO had arrived at that point.
On the other hand, I’m not saying you should sell, or anyone else should. It’s just the way it seemed to me. I changed my mind about the stock when the losses just continued. And those are adjusted losses. The GAAP losses are much bigger.
I do hope it works out, as I really liked the company, but I’m out for now.
PS - INFN was a story stock when it was recommended by MF, seven years ago (or nine?). It languished all that time and now is finally making it. TSLA was a lot of fun at $33 (when I first bought it, or at $60, or $90. Exciting! It was a great story with a great product. But then it gradually turned into a car company. A great car company, with great products, but still primarily a car company. It hit $250 in Feb 2014, nineteen months ago. Since then it’s been up to $285 and down to $185 a couple of times it seems to me, but it’s still at the same $250 today that it was at nineteen months ago (to put it in perspective, that’s more than six quarterly reports ago). Not nearly as much fun and not nearly as exciting. When story stocks become real companies they may continue to do well, but they have to continuously prove themselves.
Looking at my stocks, SWKS, BOFI, CASY, SKX, etc are real companies that are proving themselves every day.
PAYC and ABMD are still story stocks, but they seem to be starting to prove themselves quite well.
I don’t follow FEYE, but when I read about it, it sounded like a story stock that’s still in the exciting phase, where people are willing to excuse its lack of profits, even for the next couple of years. Will that last? How long? I don’t know.
WPRT, XONE, and SZYM are story stocks that didn’t make it. They were very exciting at first, but they never got past that phase, and when people wised up they lost 90%(?) of their value. (That doesn’t mean they won’t ever make it, but it’s climbing out of a hole now).
Hope this has been interesting.
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