Second Chance Stocks: Reviewing Misses From the Year

One of the reasons that I left my job as a financial advisor with a big brokerage was that we had a fundamental disagreement about how customers should manage their accounts. That was back in 2010-11, and the firm was, understandably, dialing down risk wherever they could. They themselves had narrowly avoided collapse just a couple of years earlier and were, like every firm, beset by complaints and lawsuits from customers who had lost money in the crash. Their response was to take an ultra-conservative stance to managing clients’ money, whereas I was convinced that many of my clients should invest in individual stocks, dedicating a portion of their account to “swing” trades, with time horizons measured in weeks or months rather than years or decades

I would like to say that that was because I was smart enough to realize that the time was right for that; that I foresaw the sustained recovery that we saw from 2010-2019 and knew that high-beta single stocks were the way to go. It wasn’t that it was just that investing that way makes sense for people like me: We are tinkerers, impatient ones who find a “set it and forget it” approach excruciating, even though logically we know that time has shown that to be the most successful strategy. If we dedicate just a small percentage of our account to trading in the relatively short-term, we can satisfy that urge to make investing adjustments while leaving the bulk of our money where it should be, in long-term investments.

If you do that, though, you have to be disciplined. It is fine taking advantage when stocks are oversold or when there are outside factors that you believe will give something a short-term boost, but only if you don’t hesitate to cut for a small loss if things don’t pan out as you hope. That approach worked well during that sustained bull run in the 2010s and even during 2020 and 2021, but this year, it has hit a snag. Pretty much everything except energy stocks has fallen this year; anybody who has taken a swing trade approach is probably left with less than they started the year with, but hopefully with the discipline to set and stick to stop loss levels.

That prompted me to do something that conventional wisdom says a writer like me should never do, look back at my bad calls this year; the stocks I bought that just refused to cooperate and hit their stop-loss levels. Some of them, the bull case scenario I envisaged just didn’t pan out, but there are a few where the fundamental case is intact. A combination of market sentiment and timing have pushed those stocks so low that they are worth another try.

The first of those in Nu Holdings (NU). Shortly after their U.S. IPO in December of last year, I wrote positively about the Brazilian online bank, noting that even though the Brazilian election looked likely to be won by a party on the left, their role as a disruptor and challenger to the status quo would make that much less of a negative for them than for establishment banks in Brazil. I still believe that to be true, but the market clearly disagreed this year:

The weird thing is the company’s results suggest that I was right all along. Nu Holdings stopped losing money, and their last two quarters have seen EPS of zero and a tiny profit. That may not sound too impressive, but for a company growing revenue at an 86% YoY clip, any earnings positive result is good. Still, the assumption seems to be that Lula, the old/new Brazilian President, will be a problem, and the stock has gone nowhere for six months or so. As a result, it has formed a support level at around 3.75 and being within about 30 cents of that right now is worth another try, this time with a stop at around $3.25, the all-time low hit in May. In the interest of full disclosure, I am already long NU.

Another one that caught my attention as I plowed through my bad calls was DraftKings (DKNG). I suggested buying it in August, after yet another big sports TV deal was inked, but the stock is still being punished by the market for being growth-focused, and the chart since that article looks like this:

And yet, the base case that I laid out for DKNG still applies. Sports betting has always been big business in America but now it is up front and legal. As states open up one by one to the idea and the tax revenue it generates pushes moral indignation to the back burner, there are more and more opportunities for DKNG.

It is, however, a very competitive industry right now, which means even more promotions and giveaways. That has severely damaged short-term profitability, but YoY revenue growth of over 135% last quarter shows that for all they are hurting the bottom line, these promotions are achieving their goal. Betting customers tend to be like cell phone customers in that their business is sticky so, in the long-term, high acquisition costs can be justified.

At some point, either DKNG will swing to profitability or growth will come back in vogue, maybe even both at the same time. If that happens before the stock hits what will be my new stop loss level at around $11, then I will be going along for the ride back up.

Looking at bad calls is never fun, but in a year like this they are inevitable and reviewing them can actually be useful. You can find things like NU and DKNG in my case, stocks that I had bought and cut for a loss a while ago then forgotten about, but where the base case for buying them still exists and they are worth another chance from a much lower starting point.

* In addition to contributing here, Martin Tillier works as Head of Research at the crypto platform SmartFI.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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