Selected excerpts from the Knowledgebase -4
I’ve decided to do a daily small excerpt from the Knowledgebase as sort of a thought for the day. In many cases I have added commentary, extra thoughts, or small updates. I hope you’ll find them interesting.
Saul
Here’s the fourth:
To get an idea of the problems of falling in love with a stock and refusing to admit a mistake, and incidentally to see how well my method of evaluating stocks works, here’s a post I made on the XONE board back in 2013 when MF was touting XONE as the next greatest thing and the price was $59.
“Why would a stock with negative earnings, that has never had a profitable year, be selling at such a huge inflated price. Granted, some is about prospects for the future, and some is the 3D printing hype, but some must be hopes of the company being acquired. Look, last year they lost $10.2 million on $28.7 million of revenue. That’s a negative margin of 35.5%. It means they lost 35 cents on every dollar of sales!!! To put it simply, revenue was about $29 million and expenses were about $39 million! They lost 20 cents this quarter in spite of great revenue. Say that by magic they overcome the loss in the next three quarters and finish the year with 25 cents profit. I’m not rejecting the possibility. With that miraculous result, they’d then be selling at over 200 times earnings. (220 times to be exact)…What can I say? I think the technology and the company may have great futures, but the stock may be miles ahead of itself. Miles and miles and miles. I may be totally wrong, and greatly underestimating, but it’s worth considering those figures.”
That post got all of two rec’s! No one on the XONE board, which was a very active board at the time wanted to hear what I said, because they were married to the stock. XONE’s price dropped to $6.50 in 2015 (from $59.00 when I wrote that), losing almost 90% of the value it had had when I posted that evaluation three years ago. It was finally sold by MF in August 2015, down 82.9% from the recommendation.
And then there was WPRT. I sort of became famous when I was drummed off the WPRT board by angry people because I warned that the revenue would have to quintuple before they could even break even. You wouldn’t believe the bitter, sarcastic, and furious comments I received because I pointed out that their beloved company simply couldn’t ever break even in their lifetime. The price was $32 at the time, and it was being strongly, STRONGLY, recommended by the MF at the time. As I remember, I explained losses were well more than revenue, so that their expenses were more than double their revenue, and they only had 30% gross margins, so revenue even rising 100% would only cut a fifth off their annual losses. The company was predicting revenue up all of 15% for the next year! Nothing! But nobody was willing to listen! The price is $1.61 as I write. From $32.00 !! It has lost 95% of its value.
A big problem is that the ones that go down keep sopping up more and more of one’s total investment as many people “double down,” “reduce my average cost,” “buy at better value points,” and generally put in more and more money in at lower and lower prices. For example, on the WPRT board, when the price dropped from $32 to $25 lots of people felt it was a bargain, and bought more, and at $20 “doubled down,” and “doubled down” a second time at $15, etc. It’s hard for people to see a stock they believe in go down to what they think are ridiculous levels without buying more, especially when it’s misleadingly still labeled a “Buy.” (Remember, it’s at $1.61 as I write so even those $15 purchases are down almost 90%).
What’s the message of this post? Don’t get married to positions! Especially if they are losing gobs of money, with no clear path towards profitability. Be willing to consider contrary arguments and evaluate them. Only then, after careful consideration, consider adding to a falling position.
You may find a contradiction between my feelings about XONE and WPRT as expressed above, and my investing in a company like Shopify, which is still losing money. However there are significant differences: To start off with Shopify’s losses were 3.5% of revenue, while XONE’s were 35% of revenue!!! And WPRT’s losses were over 100% of revenue!!! Second, Shopify has been regularly growing revenue at over 90% year over year. That means that Shopify has been purposely spending all their profits on massive growth to capture their field, and that they could slow growth tomorrow, just a little, and show a profit instead of a loss. There is little or no relationship between the situations
