Email

How to Keep Loser Stocks Out of Your Home-Run Portfolio

1 | By Shah Gilani

Everyone wants to find that one stock they can get rich and retire on. It’s the dream, and it’s fun to fantasize about.

However, the reality is that you’re as likely to find “the one” as you are the Holy Grail.

That doesn’t mean you shouldn’t try. You absolutely should… Just not in the way you probably think.

Not only is it fun trying to find “the one” stock that’s going to make you rich, it can also be very fruitful.

Chances are you’re not going to find “the one,” but that shouldn’t stop you from building a portfolio of wannabes. Your millionaire-maker might be in there, but even if it isn’t, you can still hit it out of the park with a solid portfolio of ten or twenty winners.

While it’s obviously important to have winners in your portfolio, what’s talked about far less is how to avoid losers.

If you can avoid dead weight, your chances of building a monster portfolio are far greater than you ever imagined.

Here’s one stock you’ll never hit a home run with, and how to keep any other losers out of your portfolio…

Blue Apron’s Red Flag

The two “tricks” to building wealth through a stock portfolio are:

  1. Buy stocks that have a wide audience for their products, preferably an audience/customer-base that will keep growing.
  2. As your stocks are going up, add to them. Buy more shares (yes, at higher prices) and reinvest your dividends (if the company pays dividends) back into more shares of your winners.

Of course, if you pick losers you’re never going to build any wealth. In fact, you’ll probably throw in the towel and miss playing a game that you could win bigtime.

One of the ways everyone thinks is the road to riches is to get into the next hot IPO, and ride that cheap stock to the moon. That can work.

But if you’re going to chase IPOs, you need to know what to avoid or when it’s time to bail.

Blue Apron Inc. (NYSE:APRN), which IPO’d on June 28th, is a good example of what not to buy.

The meal kit delivery company was originally supposed to be priced in the high teens.

Underwriters had to ratchet down, again and again, to what price they’d bring the stock out at.

That’s always something to look at. You want to know why the underwriters, who stand to make more money on a higher priced IPO that goes up than on an IPO they have to price down and support, are knocking the price down. There’s always a reason, and sometimes a few.

The debut price begins to fall when the underwriters are calling their clients and asking how much stock they want to buy at the initial price, and clients aren’t biting.

Blue Apron stock got priced at $10 for its debut, considerably below expectations.

One big reason was that rumors were circulating that APRN had asked for more credit before going public, but their backers decided it was too risky and left them hanging.

Like I said in my article a few weeks ago about Blue Apron’s IPO, “Apparently, going public was a necessity.” Their IPO prospectus for the company said, “…it believes its cash and borrowing capacity will be sufficient for at least a year. If the company becomes strapped for cash, it may increase its borrowing capacity under a revolving credit facility or raise additional funds through equity or debt financing arrangements.”

That circulating rumor knocked the initial price down. But so did the news that Amazon.Com Inc. (NASDAQ:AMZN) was buying Whole Foods, which signaled Amazon’s aggressive move into food. And wherever Amazon sits at a table, everyone else goes hungry.

Blue Apron was finally priced at $10, giving it a market value of $1.9 billion. Pretty big, but not nearly the $3.2 billion initially talked about.

All that’s a big red flag for IPO investors. If institutional buyers don’t want the stock (and trust that they’ve been pitched the hard facts and figures), you probably don’t want it either.

The Difference Between a Winner and a Wannabe

The number one attribute a good company has going for it is a wide audience for its products, a command of the space it’s in, and the potential to grow its customer base and market share.

Coming to market, Blue Apron was the biggest meal kit company in the U.S.

When your business is delivering prepackaged ingredients and recipes to subscribers’ doorsteps for them to prepare at home, you better have happy subscribers. There’s a lot of competition out there, especially from restaurants.

About those customers…

According to a survey of 45,000 meal kit subscribers by Cardlytics in 2016, after one month, the retention rate was only 77%. After six months, the retention rate dropped to 48%. And after one year, only 29% of subscribers were still on board.

So much for building on its subscriber base.

The stock’s been a loser since it came out. It’s exactly the kind of stock that you don’t want to park in your dreamcatcher portfolio.

Then again, some people might look at Facebook’s IPO and how it tanked and has since skyrocketed. They might then look at APRN and think it’s cheap and a buy down here, some 35% below where it came out.

In fact, some of those people are Wall Street analysts.

RBC Capital Markets analyst Mark Mahaney recently said, “We believe Blue Apron is addressing a large, multi-billion-dollar market that is nearly all offline and taking spend away from both traditional grocers and restaurants.”

Analyst Michael Graham of Canaccord Genuity said, “Competitive moves from Amazon and investor concerns around customer retention have put significant pressure on the stock both before and after IPO pricing. We believe this has created a bargain opportunity.”

But with the stock below $6.50, 5 out of 11 analysts who initiated coverage recently warned that Blue Apron shares shouldn’t be valued at more than $10. Some of those same analysts saying that were underwriters of the IPO.

I knocked APRN stock in my July article because it makes no sense to me.

You’re going to make money by putting proven winners in your portfolio, not wannabes.

Betting that APRN is the next FB is a fantasy. Sure, it could pop. It popped 20% when analysts touted it last week, but then it came right back down.

Blue Apron is a gambler’s stock. If you want to hit homeruns, you can’t gamble on wannabes until you’re blue in the face.

Sincerely,

Shah

One Response to How to Keep Loser Stocks Out of Your Home-Run Portfolio

  1. Alice in Wonderland says:

    O.K. then, how about SNAP? Analysts “a.r.e.” “wondering” “i.f.” “i.t.” “is” another APRN. They have a “huge” following of “filter lovers.” They have “money.” Butt, they say they may “never profit.” Why not? SNAP’s debut was a DOGG.

Leave a Reply

Your email address will not be published. Required fields are marked *


three + 9 =