Five Ways to Lose Big Money Quickly, and How To Avoid Them
The First Shall be Last
One Great Stock
I don't typically write about failures in these columns. The
mass media gives you enough bad news.
But today I'm making an exception. Today I'm going to analyze
five once-popular stocks that hit new lows last week.
To teach you a lesson, of course. Typically, we learn best from
our own failures, but that can get expensive in this business. So
instead, we'll try to learn from the failures of others.
In alphabetical order, then:
was once touted as the Expedia of China. Smaller and
faster-growing, the company racked up a perfect 10-year record of
growth of both revenues and earnings.
Cabot Top Ten Trader
did very well with the stock in 2009.
But the stock's upward momentum slowed and eventually reversed,
and in 2011 there were several technical signs to exit; the chart
made lower highs and lower lows, and there were gaps down in May,
July and November. If you had sold after the first gap down, you
would have sold at 44; if you waited until the second gap down,
you would have sold at 40. And if you'd waited until after the
third gap down, you would have sold at 30.
A huge gap down, especially on earnings, is never a good thing;
it's a strong suggestion to sell. CTRP is now trading at 20,
earnings estimates are being reduced and there's growing talk of
rising labor costs and increased competition.
Diamond Foods (
markets Diamond brand nuts, Kettle brand potato chips, Emerald
brand snacks and Pop-Secret popcorn. In September 2011, the
company was flying high. It had received approval to buy
Pringles, had reported record results for fiscal 2011 and had
raised guidance for fiscal 2012.
Then the trouble started, with a question about the legality of
the company's non-GAAP accounting methods, in which it pre-paid
walnut growers for their future harvests. If you had sold after
the company's first explanation of innocence (October 3), you
would have sold in the 70s. If you had sold after the stock's
first big gap down (a month later on November 2 when Diamond
announced a delay of the Pringles deal), you would have sold at
50. If you waited until news of the SEC investigation surfaced,
you would have sold at 26. And if you had waited until the
Pringles transaction was actually cancelled (February), you would
have sold for 22!
Just as there's never just
cockroach, there's seldom just one piece of bad news. It often
snowballs. And once that trend gets going, it generally goes
further than originally expected. DMND is now selling at 21, and
pursuing strategic options like being acquired.
First Solar (
led the pack of the top-performing solar power sector in 2007,
soaring from 30 to 267.
Cabot Market Letter
subscribers bought in March, and saw profits as big as 456% (they
were advised to take some profits off the table on the way up)
before the stock rolled over in 2008.
Revenues at First Solar have grown every year since then, and the
long-term future for solar power remains bright. But all this
time, competition has been growing, putting pressure on prices.
FSLR traded sideways for most of 2009, 2010 and the first half of
2011, generally trading between 100 and 150. And then the bears
took control, pushing the stock down and down and down. It's now
trading under 18, and the sellers are still in control.
He who was first will often be last. And once a big winner rolls
over, the power of the potential sellers exiting that once-hot
stock can overwhelm the power of potential buyers. By many
measures, FSLR (now trading 88% off its highs!) is a great value
here, but of course people have been saying that for the last
hundred points of the stock's decline.
was the big dog in consumer electronics once upon a time. In
fact, I remember buying three big bulky Sony TVs when my wife and
I added to our home in 1995. But there's a new big dog in town
now--named Apple--as well as myriad smaller competitors. So even
though Sony had record-high revenues in 2011, earnings have been
challenged; they peaked in 2008. As a result , institutional
investors have been exiting the stock for years; it's now 45% off
Even the best-managed company eventually matures, and as it does,
institutional growth investors move to faster-growing younger
stocks. If you're a growth investor, you shouldn't hang around
the senior citizens center, you should prospect at the high
is your online doctor, a free source of information on what ails
you, or (ideally) on how you can minimize ailments. It has a
perfect 10-year record of revenue growth, as well as great name
recognition in a crowded, competitive field. But earnings trends
have never been steady, and now they're in trouble, with
estimates being reduced. The problem: Advertising dollars are
fading, reducing by cutbacks on drug ad spending and migration of
the spending to social networking sites. Shares of WBMD topped at
59 last summer; now they're down to 22, having lost an impressive
63% in 11 months as investors leave WBMD like rats deserting a
Don't confuse the company with the stock. While you might like
the website and note that business continues to grow, the stock,
looking ahead, tells a different story. (Also, WBMD has had five
notable gaps down since last summer.)
Now let's see if we are able to apply any of these lessons to a
present-day popular stock that is losing its way.
Green Mountain Coffee Roasters (GMCR)
was a great hot stock for
Cabot Market Letter
in 2011, with profits topping 80% in just six months. We sold our
final positions in October at 70, as the stock was gathering
downside momentum. A month later it hit 34, which proved to be a
floor for five months. Then, just last week, the stock plunged
48% in one day, as expiring patents and looming competition from
Starbucks led management to lower its guidance.
Now some folks are asking if GMCR is a bargain here, 77% off its
high. Looking at the lessons above, what can we say?
One. A gap down is never a good thing. This is GMCR's fourth gap
down since November.
Two. There's seldom just one piece of bad news. This wasn't the
first and it's unlikely to be the last.
Three. He who was first will be last. After a very profitable
ten-year uptrend followed by the stupendous performance in 2011,
GMCR still has lots of downside potential left. Note: the fact
that it's already down 77% doesn't mean it can only fall 23%
more. Nope, it can still fall 100% from here (though we're not
Four. Even the best-managed company matures eventually. This is
probably the least applicable, as I think Green Mountain has
plenty of growth ahead. But I could be wrong!
Five. Don't confuse the company with the stock. Feel free to keep
drinking the coffee, but don't let the steam from that brew cloud
your vision. GMCR's trend is now down, and the odds are the
downtrend will go on longer than most investors currently
On the upside, as you're debating selling GMCR you can think
about buying the stock that appeared in today's issue of
Cabot Top Ten Trader
It's a young, fast-growing company in the field of network
management software, which is an unglamorous but huge
The company's products basically monitor what's happening on a
company's networks and in its servers, and help managers
configure their systems for optimum performance and/or
Previously, the field had been dominated by giants like IBM,
Hewlett Packard, Computer Associates and BMC Software, but this
little company is making inroads fast because it has a lower-cost
sales model than these companies; it makes heavy use of Internet
marketing. The result is fast-growing revenues, earnings and fat
Furthermore, the company is acquiring smaller competitors
rapidly; it's bought six firms since 2011.
First-quarter results were released two weeks ago, and they were
awesome, beating analysts' estimates easily. Revenues are
accelerating (very impressive), as new products and new global
markets quickly bear fruit. All told, it's a great growth story
and one of the best I've reviewed recently.
But I can't give you its name now because that wouldn't be fair
to subscribers of
Cabot Top Ten Trader
, who received their issue after the market close today and thus
won't be able to act on the recommendation until tomorrow.
But if you simply take a trial subscription to
Cabot Top Ten Trader,
you can read all about this fast-growing company, as well as the
other nine hot stocks in this week's issue, all of which have far
better short-term prospects than Green Mountain Coffee.
To learn more,
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory