It's tough to pick stocks that regularly beat the market, although Fool co-founder David Gardner's Rule Breakers and Stock Advisor portfolios both have done so. Nobody's perfect, however, and as he has often said, every portfolio is going to have losers. Sometimes, in fact, you can have more losers than winners and still earn a well-above-average return, because a few big gainers can make up for a lot of underperformers.
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So, The Motley Fool is, relatively speaking, comfortable with the idea of bad investments, but we're also serious about the need to acknowledge them. But even David admits he doesn't love doing this particular annual episode, so for this week's Rule Breaker Investing podcast, he recruited a slew of Foolish guests to help take some of the sting out of reviewing his biggest losers of 2015, 2016, and 2017. We'll hear why he was optimistic about them, what went wrong for them, and their outlooks from here.
A full transcript follows the video.
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*Stock Advisor returns as of January 2, 2018
The author(s) may have a position in any stocks mentioned.
This video was recorded on Jan. 10, 2018.
David Gardner: All right. Welcome back to Rule Breaker Investing.
Here you are! You found me! My least favorite podcast of the year. You found me! I have to do it! I don't want to do this podcast. Each year I resist wanting to do this podcast. But the Fool in me forces me to want to hold forth about the worst stock picks that I've made over the last three years.
Now, there's some good news for this for me, because if I made a really bad stock pick four years ago, it drops off the list. For example, last year in David's Biggest Losers, Vol. II, last year I mentioned GoPro. We went over GoPro and what had happened to GoPro. Well, GoPro had really bad news once again this week and dropped even further, but it's not featured on my David's Biggest Losers, Vol. III podcast because it's no longer made within the last three years. So yes, I have even more losers I could talk about than the ones we're talking about this week.
Now, I'm always put in mind of one of my favorite Shakespeare quotes. I just looked this one up to double-check. It's from Act IV, Scene I of As You Like It. "I'd rather have a fool to make me merry, than experience to make me sad." And the reason I'm putting that out there to you is that we all have some tough moments. We all have bad stock picks. And isn't it more fun to do it as fools with each other. We can have some merriment and some fun rather than just think about the sad experiences.
And in order to demonstrate that this week, I've got a few different Fool voices to come in and talk with me about my worst stock picks. "I'd rather have Fools to make me merry, than experience to make me sad." I'll be joined by a number of my favorite Fools, here, at Fool HQ as we go over my worst six stock picks of the last three years.
Now, before I welcome in my fellow Fool analyst and advisor Jim Mueller to talk about my worst stock pick of the last three years, a few things.
First of all, I want to say this is normal. It is normal to lose when you make stock market selections of your own. It is normal, no matter how good you are [sometimes if you're a Rule Breaker] to lose quite a lot, and each of the bad six stock picks we're going over this week, even in one of the better bull markets in all of history, has been horrible. These are horrible returns, but this is normal.
I talked last year. This is one of my favorite analogies I use for investing. Investing is a lot like learning how to skate on ice. No one that I've had the pleasure of stumbling around an ice rink with -- nobody has expected that as they learn to skate that they won't fall and look silly, and slam into the boards. You go out there, tentatively on your skates, expecting to fall, and that's exactly how it is for investors. And I don't just mean learning investing. I mean even investing 30 or 40 years after you started, you're falling all over the ice out there. At least I do. And so, this is normal.
And I said normal in two respects. The other kind of normal is that it's normal for us at The Motley Fool to talk about our losers. After all, we called ourselves The Motley Fool about 25 years ago this year. We called ourselves The Motley Fool, in part, because we wanted you to know we're fools. We're all fools, aren't we? We make mistakes, and that's part of life. Definitely part of investing as will be very evident in this week's show. And this is normal. It's normal for people who call themselves Fools to acknowledge that and to share it, and maybe share the learnings and the insights they have around what hasn't worked for them.
You don't see that a lot these days. On television -- financial television -- you don't see people coming on talking about their bad picks or their losers. You don't see that in many other aspects of our culture today. But I think it's really great that we, at The Motley Fool, do this. I'm happy to do this, even though I hate doing it this week. This is normal.
So, as I get ready to welcome on Jim Mueller, I'm going to share a couple of quotes. I'm going to do this throughout this podcast. I'll be sharing with you quotes about winning, and I've specifically hand selected these quotes from football coaches, because it's that football time of year. I hope you enjoyed it if you're a football fan. I hope you enjoyed the college football final between Alabama and Georgia. An unforgettable ending for anybody who watched that game.
The Super Bowl is coming up at the start of next month for anybody, especially in the U.S., or maybe even worldwide who cares about the Super Bowl. It's football. It's that football time of year. And darn it! I've discovered that there are a lot of quotes about winning and losing from football coaches. Here are a couple just to kick us off.
This one comes from Lou Holtz, the longtime college football coach. I think of him mostly at Notre Dame, but Lou Holtz, now in his eighties, coached a lot of places. Here's a Lou Holtz quote.
"Winners embrace hard work. They love the discipline of it, the trade-off they're making to win. Losers, on the other hand, see it as punishment. And that's the difference."
And the reason I selected that Lou Holtz quote for you is because that's what we're doing this week. We're actually disciplining ourselves. We're going through the hard work of seeing what happened to these stocks. And with the help of my Foolish friends, we're going to look through the rearview mirror at the mistakes we've made, and now we're going to start looking through the windshield going forward and try not to make those same mistakes. Thank you, Lou Holtz!
And then one other. Vince Lombardi.
"Winners never quit and quitters never win."
And the reason that Vince Lombardi and I wanted to share that with you, today, is that a big part of success in investing, and indeed in life, is resilience. It's just keeping it going. In fact, I made resilience one of my five core values of the United States of America. If you're an American I, anyway, think that we are a tremendously resilient country. I think that should be part of our pride in the national conversation. And so, yeah, resilience, Vince Lombardi, and stock picks. Let's get it started!
David's Biggest Losers No. 1: Loser No. 1, this year, and it's appropriate to call it No. 1 because it is my single worst loser. I like to lead off with the worst of all. And my friend, Jim Mueller, had absolutely no responsibility in this stock pick. I mean, this is my stock pick. This is even from a service that Jim doesn't work on, but Jim, you've graciously consented to come in and talk about Synchronoss Technologies (NASDAQ: SNCR). The ticker symbol is [SNCR]. Jim, how many years have you been at The Fool?
Jim Mueller: I've been here at Headquarters for a little over 10 years, but I've been a Fool for about 12 years.
Gardner: Awesome. And what are a few of the things that you do here at The Fool?
Mueller: I've been a long time analyst for Stock Advisor, covering both your side and Tom's side. And then I was picked by you to be on the team that runs Phoenix 1. Then when Rick Munarriz, you, and the group launched Phoenix 2 and Rick took over that, I moved up to lead portfolio person on that team.
Gardner: That's right.
Mueller: And I also worked on the Options service with Jeff Fischer and Jim Gillies.
Gardner: That's great. So, a motley life, which is true of so many of our employees here at The Fool. Jim, a pleasure to have you join me. Again, you had nothing to do with this stock pick. The actual date was March 25 of 2015, but it was probably a month or two before that I started paying attention to Synchronoss Technologies. I picked the stock at $45.70 that day, just about three years ago, and today as we're taping it's gone from $45.70 to $9.33.
For this podcast this week, we have a simple format for each of these stocks we're going to go over. Two things that went wrong, and then one thing maybe to hope for or to continue to watch. Jim, let's go right at Synchronoss Technologies. A really brief background. What does the company do in a sentence or two?
Mueller: They provide cloud-based services for customers of telecom communications companies like Verizon. It used to be AT&T, as well. If you have to upload files to the cloud, you're using Synchronoss even though it's Verizon's cloud. And for a long time, they were paid to activate the cellphones, but they've since gotten rid of that since you've recommended it.
Gardner: We'll talk some about pivots. Jim, what is thing that when wrong No. 1 for Synchronoss?
Mueller: Synchronoss this past year has done a lot of self-inflicted damage. They decided to get more into the cloud, and that's good, because the activation service they provided was a flat fee, one-time fee. No recurring revenue. And people had to keep on buying cellphones and activating them for them to grow.
Gardner: So, as you have your new cellphone, you're activating it...
Gardner: ... and Synchronoss is participating in that on the technology side for their telecom partners.
Mueller: Verizon, AT&T, and all those guys. But they also had a cloud business, where they provided the hosting and interaction for people uploading files, videos, pictures, and stuff like that. That's a recurring revenue stream vs. the one-time only revenue stream that the activation business was.
They decided to go further into that, and buy a company called IntraLinks Holdings. The CEO of that, Ronald Hovsepian, would become the CEO of the combined company. He did. And the longtime CEO and founder, Steve Waldis of Synchronoss, stepped back as executive chairman of the board.
But that didn't work out so well. Their revenue growth targets weren't going to be met, so they announced to the market that that's not going to be doable. Then they also had a second problem [this is the second thing that went wrong] in that they, at the same time, found out that they had to restate some of their financial statements for 2015 and 2016, and then later on last summer they added 2014 to the mix.
So, two bad things: a bad acquisition with IntraLinks, which they have since sold to a group of investors, Cirrus...
Gardner: And how remarkable is that? They made an acquisition, they took that guy that they acquired as their new CEO, and now, not much more than a year later, they've now sold that company back out and tried to become Synchronoss again.
Mueller: What's more remarkable is that they made a profit on the sale. They bought it for roughly $820 million and they sold it for right about $1 billion. So good for them on that. So, Waldis was back in the CEO position for a while, and then they recently hired Glenn Lurie [who retired from AT&T] and then came on as CEO for Synchronoss, and Steve Waldis has again stepped back to be executive chairman.
Gardner: So, those are two things that have clearly gone pretty wrong. We're going to go with one thing to watch going forward. Now, it might be watching hopefully, or it might be watching carefully, but what's one thing to watch for Synchronoss shareholders?
Mueller: They're really going forward with the cloud system. If they can succeed with that and sign up more customers [beating the telecom companies, offering the cloud system to their own customers], then that could work out well for the company. But there's a lot of competition in this space. So, hope for it, but it's going to be a tough road for them.
Gardner: What an interesting and sad story, but here we are at less than three years since I made that stock pick, and the company made a big acquisition, because you mentioned they sold back IntraLinks for about $1 billion. The market capitalization, the value of Synchronoss as a company today, is only about $0.5 billion. So, they bit off a huge thing, more than they could chew, tried to change their business, then sold that off, as you mentioned, at a profit and they're just seemingly trying to return to the company that they were before.
Mueller: Well, they are at $0.5 billion now. Back when they made the acquisition they were about at $2 billion.
Gardner: Don't remind me.
Mueller: That was about 75% ago.
Gardner: Well, when a stock drops 80%, which is how much Synchronoss has dropped since I picked it in March 2015, that market cap is going to come down quite a bit, isn't it?
Gardner: All right, Jim. Thank you very much for pinch-hitting. We're a little short-handed just a week into the New Year, so you came over and graciously talked about a Rule Breaker, even though you're not working on our Rule Breakers service. Thank you, Jim!
Mueller: I was glad to do it, David.
David's Biggest Losers Nos. 2 and 3: The worst stock I've picked in the last three years. I'm not just going to say No. 2 because it's number two and No. 3 and thereby hangs the tail. We might get into that. For this I'd like to introduce my friend and Fool fellow analyst Abi Malin. Abi, welcome!
Abi Malin: Thanks for having me!
Gardner: Abi, how many years have you been at The Fool?
Malin: Almost three, now.
Gardner: Excellent. Where did you come to The Fool from?
Malin: I came out of our internship program, but before that I went to Tulane University down in New Orleans.
Gardner: Excellent. A shout-out to Tulane.
Gardner: Which has a very good investing curriculum.
Malin: We do. We have a Burkenroad program, so we do like full-scale research reports on small-cap equities.
Gardner: And you were doing that as an undergrad.
Malin: I was.
Gardner: And we're lucky to have you here at The Fool. Abi, here you are and here we are, and we're going to talk about [FEYE]. Now this is a return appearance for this stock, because we did talk about this a year ago, which is a reminder that this will be the last year we talk about this stock, because I made these picks [two of them in February and June of 2015]. We went over how bad FireEye (NASDAQ: FEYE), [FEYE] had been last year, but it's still going, and it's back. And Abi, you're here to talk about FireEye. Thank you very much!
First of all, in a couple of sentences, what does this company do?
Malin: On a very high level, the company's technology, intelligence, and expertise helps to prevent, detect, and resolve cyberthreats. But more specifically for FireEye, they actually use a virtual machine technology called Multi-Vector Virtual Execution, or MVX Engine for short.
Gardner: Nice. Bringing the acronyms with you.
Malin: Definitely. They protect their customers' networks against external threats by simulating an operating system to get malicious code to activate within the virtual machine rather than in the customer's actual network.
Gardner: Very well explained. Yes, indeed. And in addition, they had acquired Mandiant Corporation, and today the CEO, who is not the CEO when we first picked it three years ago; today Kevin Mandia is the CEO of FireEye. So good, a little bit of background, then, on what the company does.
And at the time I was thinking [and I still think this today] that this is an industry that is going to be around for the rest of our lives. As long as there's an internet -- as long as there's technology -- we're going to need cybersecurity. It's going to grow [that's what I was thinking], and at the time FireEye was an up-and-coming player. I liked it. More of a local angle, here, and a smaller-cap company. You're right. It's a big world out there. Abi, what is thing that went wrong No. 1, here, with this company and this pick?
Malin: I think the first thing is when we first looked at it, we liked what they call "sandbox strategy" of having this virtual machine, and in our original rec we actually referenced that 95% of customer trials that test FireEye actually find a malicious threat missed by a customer's existing security infrastructure. And so, there is a superiority to this platform, but just in this highly fragmented market that constantly evolves, you have a lot of big players like Cisco, Juniper Networks, Intel, IBM, Palo Alto Networks and a variety of other smaller players.
This sandbox strategy is seen as more of an add-on than necessarily a primary security measure, and so general consensus seems to be that the FireEye product is superior. It's still priced at a premium, and many customers may opt for a more comprehensive solution from one of those other existing players rather than adding this on at such a premium.
Gardner: So, I guess the thing that went wrong No. 1 is something along the lines of I picked this stock that is a company. That is a small company in a huge and growing industry that has constant innovation. And, as it turns out, its application isn't considered core or seminal [as] some other stocks. And I'm happy to see at least a few other stock picks of ours in there. You mentioned Palo Alto Networks. That is a Rule Breaker and a bigger and clearly superior company. I understand. What's thing that went wrong No. 2, here?
Malin: So, we've seen the company shift from product sales to subscription revenues, but now we're seeing another transition, and this is to shorter contracts. In the most recent quarter, their average contract length was about 25 months as opposed to 27 months a year ago, and management projects that this can come down as low as between 20-24 [months] in 2018. Analysts have a little bit of concerns regarding their customers committing to FireEye's products for the long term.
Gardner: Now for those of us who may still own FireEye, and I include myself among them. I personally own these shares that are well down from where I paid. By the way, I should mention that I picked FireEye at $46.17 back on February 20, 2015 and then four months later, as it had moved from $46 up to over $53, I recommended it again, liking to add to my winners, as I do. And that position is now down 73%. So, those two positions down 73% and 68%. For those of us who are in this boat -- sitting in the FireEye boat -- wondering what we should be looking for, what's something that's maybe a note of hope, or not, for us going forward?
Malin: I think one thing that can provide a little bit of hope for the future is that they are following this typical, strategic growth path for a security firm, so they entered the market with a really strong initial product that was very specific, and now they're building out an ecosystem of traditional products around it.
They also have this competitive advantage in the quality and recency of the cyber intelligence threat data that they collect. If they can harness both of those advantages to build out a suite of products, and maintain that high quality that they've already been known for and have built their brand around, I think this could still be a turnaround.
Gardner: Well, I appreciate you saying that. I remember. Part of our thesis three years ago was we were all hearing at the time about cyber break-ins and this or that. Large retailer giving away millions of email and other information. Database break-ins. And this company would be hired in as the forensic guys who would come in and let you know afterward what had happened. I loved this idea of this cyber SWAT team coming in and fixing things, or figuring out what happened.
It still feels like a big industry and a relevant business. This is a company [and we may draw some lessons at the very end of this podcast], but this is another company that changed its CEO in just a few years since I picked it. So, a little pattern recognition, there, perhaps as well. Abi Malin, thank you very much for helping us to learn more about FireEye!
Malin: Thanks for having me!
David's Biggest Losers No. 4: All right. Here we go with my fourth worst stock pick of the last three years. And those first three -- one reflection I have about them is that they were all picked in 2015, so they've had a few years to really, really be bad. This next pick, though, I'm sorry to say I picked less than a year ago and here we are featuring it on David's Biggest Losers, Vol. III.
Yes, the date was June 28 of last year. The company -- the ticker symbol is [TRVG]. If you're a Rule Breakers member [and darn it, why wouldn't you be at this point, although this is not the best advertisement for Rule Breakers]. If you're a Rule Breakers member you might recognize [TRVG] as Trivago (NASDAQ: TRVG). The stock today has gone from $20.95 to $7.31 as we tape. So, yup, that's down 65%. That hurts a lot in less than a year. Just seven months. To help me think through and do a little analysis of Trivago, I'd like next to welcome Rick Munarriz. Rick, welcome!
Rick Munarriz: Thank you, David!
Gardner: Thank you very much, Rick. How many years have you been at The Fool?
Munarriz: It's been 22 years, now. This will be 23 once we get to October of 2018. But 22 and change.
Gardner: That is pretty awesome, especially considering we only started the company about 25 years ago, so thank you so much, Rick. What are a few of the things you do, here, at the Fool?
Munarriz: I do a little bit of everything. Obviously, I'm part of the Motley Fool Rule Breakers team that helps you find some of these loser stocks that wind up on your mixtape unfortunately.
Gardner: My mixtape.
Munarriz: I'm also in Motley Fool Supernova. I am the Phoenix 2 lead analyst. We have a real-money portfolio geared toward the retirement-minded approach. And I still write a lot of stuff on the editorial side. I have maybe 10,000-15,000 articles that I've written over more than two decades, and I'm still kicking in with articles there.
Gardner: I'm not sure there's a more prolific writer or a better writer than we have at The Motley Fool and we're not just talking about Rick as a writer. He's a wonderful, gifted stock picker. Rick, thank you for helping me think about Trivago right now. First off, for those who don't know what the company does, what does Trivago do?
Munarriz: Trivago is like a metasearch for hotels and other properties; basically, anything from bed and breakfasts to actual properties to hotels. There's 1.8 million properties all over the world that have listing pages. It's basically like a portal and a search engine where you punch in a location or name a place, and it will show up there along with advertisements of places for you to book that property. They're based out of Germany, but they're all over the world. They're in 33 different languages. It's 55 different localized website versions of it. It's pretty much a globetrotter in every sense of the word.
Gardner: That's right. And their tag line is "Find Your Ideal Hotel for the Best Price." If anybody wants to tap into Trivago.com as they're listening to Rick talk about it, you'll notice their opening screen is very similar to Google (NASDAQ: GOOGL) (NASDAQ: GOOG). It's pretty much just a blinking cursor asking you what you want to search. What's thing that went wrong No. 1 for Trivago, Rick?
Munarriz: Well, if you're going with a football theme for this podcast, I'm going to go with a football theme. I'm going to say -- and I'll make it just as topical as possible -- I guess they suffered the Georgia Bulldogs (unclear: 22:59). That they had a great first half, as Georgia did during the championship football game against Alabama, only to fall apart in the second half and ultimately lose.
With Trivago, you had a company that went public at 11 -- just 11 -- in late 2016. Obviously, we recommended it in Rule Breakers several months later after it had this monster start to 2017.
Gardner: Yes, the stock had pretty much doubled when I decided to pick it then. I mean, for a lot of people, Trivago isn't nearly as big a loser as it is for us.
Munarriz: Absolutely. Some people if they found it earlier probably aren't suffering too badly, and the stock is trading a little bit higher than when it bottomed out a few weeks ago. And it's all relative, but we've got to go by our starting line, and it's obviously been pretty bad for you and for us.
So, it had this great half. Revenue was up 58% and then 67%. And then we got to the second half, and we had 17% growth. And now its guidance for the fourth quarter, which we obviously haven't heard yet, is for between 2% and 15% growth, and then when we get into overtime, which is when the Georgia Bulldogs ultimately lost to Alabama, they're expecting possibly no growth at all through the first half of 2018 and to resume growth in the second half of the year. It's pretty much as bad as you can draw a chart for revenue growth and the stock chart. Clearly that's one thing that went wrong.
And the other thing that went wrong --they're probably both related because this is why it went wrong -- is because the model was exposed with Trivago. And I don't mean this in an awful way because obviously there's a reason why it's still on our scorecard. Trivago is basically based on a bid base. It's not like a referral thing. Like an Expedia or a TripAdvisor or any other kind of portal like Kayak, where they're getting money generated based on what you book from somebody else.
This is a lot like Google, like you said. Once you click on the ad, it will go to whoever paid for that ad, and in the case of Trivago, more than half of its revenue is coming from Expedia, which is its former parent company, and Priceline. So, the world's two largest travel portals are accounting for more than half of the revenue of Trivago. And sometime during the third quarter, both companies got smart, and they started lowering the bids that they're willing to pay. And while they took small hits in traffic, obviously they were happy enough so that they were willing to pay less.
Unlike many of the other more successful search engines or portals, Trivago suffered from these two companies bidding less and actually getting stuff, but they were generating less revenue per referral lead, and that pretty much undid the stock where growth just fell apart. This horrific (unclear: 25:40) that we have right now.
Gardner: All right, Rick, thank you! Now as you said, we've not even held this stock for eight months at this point. We're not giving up or throwing in the towel. Each of the companies that we're covering this week [David's Biggest Losers, Vol. III] each remains an active recommendation going forward. That means we would buy the shares today. We recommend people consider buying the shares today even as far down as these companies are. I'll say a little bit more about that later, but Rick, what is something to continue watching for or hoping for people who own [TRVG] or who might be looking at the stock?
Munarriz: Some silver lining to look at. Obviously, the stock is trading. It's a busted IPO. It's trading at less than the $11 IPO price it went at in late December, 13 months ago. One-fifth of its revenue right now [Europe is its largest market and followed closely by the Americas], but the rest of the world accounts for about just a little less than one-fifth of its total revenue and total business; yet it accounted for more than half of its growth in the third quarter. The referral revenue grew 52% [in the rest of the world] compared to 6% in Europe and 12% in the Americas. So, it was growing all over, but basically there's this one section that's growing a lot faster outside of the developed Europe and the Americas market that's working out.
And beyond that, even though Priceline and Expedia are paying less to reach people, the traffic is still strong. There was still 20% growth in referrals in the last quarter. The revenue does not reflect the fact that it's still very popular with people booking hotels. So, you get to the case where by the end of next year, this isn't a hard reset, where it's just going to keep declining and declining. One would hope that once we get through these next three quarters, the comparisons will start getting a lot easier, as we've seen with companies that get this one-time hit on things, as we're seeing now with Trivago.
Maybe not on New Year's Eve, but I think before the latter half of 2018 the stock will hopefully be higher. Maybe not where we bought in [where we recommended back in the $20s], but I think it's a good bounceback candidate as we work through 2018.
Gardner: All right. Rick Munarriz, thank you very much for that thinking. Not just looking backward, but going forward about Trivago. Thanks, Rick! Fool on!
David's Biggest Losers No. 5 and 6: And now to my fifth and sixth worst stock picks of the last three years, and for both of them I've invited my friend Aaron Bush in to talk about them. Aaron, welcome!
Aaron Bush: Thank you, David!
Gardner: Aaron, how long have you been with us at The Fool?
Bush: Well, I've been a member for about 10 and a half years I think, believe it or not. And I've been with Supernova for almost six years now and in-house for about four.
Gardner: And how old are you, Aaron?
Bush: I'm 23.
Gardner: And that's pretty awesome. Aaron got started as a member. As a subscriber to The Motley Fool as a teenager. Were you a tween?
Bush: I was in seventh grade. Whatever age I was in seventh grade is what I was.
Gardner: You were real close to being a tween-in-Fool, and it's a delight to have you, here, at HQ 10 years later. It's not a delight, though, Aaron, to have you bringing the message that you are bringing today, because we're going to talk about some horrific losers.
Bush: Let's do it!
Gardner: Thank you. Because you're going to be presenting them you know what they are, [and] I'm here to make sure I let my listeners know that both of those, speaking of sports, and football, and an athletically themed podcast, are athletic companies. It's kind of all coming together, here, at the end and a really dark ending.
Bush: I guess it was meant to be.
Gardner: And the first one, the ticker symbol is [UA] or, if you will, [UAA] depending on the share class of stock of the Under Armour (NYSE: UA) (NYSE: UAA) corporation. This one is kind of a shocking loser for me, because I just can't believe it's been such a loser. I mean the other companies we've talked about -- Synchronoss, FireEye, Trivago -- these are not big companies or big brands that people know. But Under Armour is a big brand that is known globally, but especially here in the U.S. Football, basketball. All of their wicking gear. I mean, we're talking about a big-time company that is down from my pick of it at $38.88 on August 24 of 2016. It's been a tough year and a half, down 64%.
Aaron, first off, a couple of sentences. What does Under Armour do?
Bush: Under Armour is a fitness apparel and sporting goods company. They sell clothing, footwear, and accessories for all sorts of sports that are out there.
Gardner: And Aaron, what is the thing that went wrong No. 1 for Under Armour?
Bush: I'll keep point No. 1 pretty broad and just point to the North American retail woes that are going on right now. As many Foolish investors already know, there's a pretty major transition in U.S. retail right now. Digital and mobile sales are booming. Mini malls are closing. Most big box retailers are closing stores, now, and a lot of other retail companies are laden with debt or whatever other problems they may have. They're not doing so hot. And naturally, as big sales points to Under Armour, when those companies struggle, Under Armour has to struggle along with them. That's been a pretty tough environment for them to be in.
Gardner: It sure has been. Aaron, what is thing that went wrong No. 2? I realize there might be a three, four, and five. You can even pack in a few items if you like into No. 2, but for Under Armour.
Bush: I'll just call it unprepared, [overambitious]. I don't think Under Armour can blame the retail sphere for all of its problems. I think that CEO Kevin Plank has always been an ambitious leader, but let me just provide you with a couple of recent examples of where maybe his ambition was to a fault.
First, Under Armour has wanted to play a bigger role in footwear for many years, and over the past two years, or so, they've redoubled their efforts, there. They have Steph Curry as the face of the brand, the well-known Warriors basketball player. But even so, they've struggled pretty terrible reviews on their shoes and pretty abysmal sales. They operationally just couldn't get it done. They just can't get it done right now, and I don't see them making that much progress. That's an example of a new line that had a lot of promise, but they just have failed to really capture the opportunity.
Second, I'll say that in 2015 Kevin Plank thought connected fitness would be the next big thing.
Gardner: And I agreed with him. I thought it was smart that they were in a way sort of becoming a tech company. Maybe even disrupting themselves a little bit in order to get into a space where with all of us with our mobile phones, we might be part of a huge community of fellow athletes and, like me, lamer athletes, but still part of a community tracking our steps, and keeping up getting insights about fitness for us. Getting healthier. It felt like the right thing to do.
Bush: Sure, and in 2018 it still is a big idea. It's still a big possibility that could come true, but I think the issue was in maybe how Under Armour went about tackling that market. In that year they spent well over $0.5 billion acquiring pre-revenue connected fitness apps. The problem there is that the acquisitions really went nowhere. They couldn't figure out strategically how they fit. They never made any money. They're barely even mentioned anymore, even on earnings calls.
Also, this big financial move completely destroyed the healthy balance sheet that the company had. Now Under Armour has $800 million in net debt and that's pretty significant for a $6.5 billion company.
So, if you combine these flops with expectations -- in 2015 and 2016, the P/E tipped 100 at one point -- it's pretty easy to see why the stock came crashing down.
Gardner: And now the company is worth what, roughly?
Bush: $6.5 billion.
Gardner: $6.5 billion, and that's so far down from where it was three years ago. So, a very ambitious CEO. A founder-led company. A guy who's created a huge amount of value. If you think about his roots as a University of Maryland football player and then transitioning into becoming CEO of a dynamic company, taken all in all, it's a remarkable story of winning, but in the last three years it's been a remarkable story of losing.
Gardner: A big theme for this podcast, and I'll have a couple of quotes at the end to speak to this. Aaron, what's one thing we can watch going forward as Under Armour shareholders? And I include myself, of course.
Bush: Beneath a really strong brand that Under Armour still has, they have two promising growth engines: international sales and direct-to-consumer sales. International sales, right now, represent only 20% of revenue, or so, and direct-to-consumer is about 35% of revenue, and there's some overlap in there. But both of those are growing very rapidly. And when you look at Under Armour and how small it is compared to Nike, which I believe is now a $100 billion company...
Gardner: And the ratio used to be much lower, but 100 or so to 6 is like we're 15-20x larger than you are, and it was not that way four years ago
Bush: Right. That big gap still exists. The way I see it is the opportunity, the runway is still there. These headwinds will still persist, but the opportunities of international growth and direct-to-consumer growth still remain.
Gardner: All right. Thus much for Under Armour. We'll keep waiting, watching, and in my case hoping. And still believing. Believing. I mean, it's been a really tough few years. They kind of shot themselves in the foot just by investing so much in something that hasn't shown up so well for them. Making some acquisitions, another theme that's emerging in this week's podcast. Making some poor acquisitions, but we'll watch.
That bring us to stock No. 6. Aaron, you're going to stay right in that hot seat. You're going to help me think through yet another horrendously bad stock pick that I've made in the last few years. This one was May 25, 2016. Here we are, still less than two years later. I'm not going to say the company name, yet, but it is athletically focused.
The stock at the time was $14.06. I liked it, so I said, "Yes, this is our newest Rule Breaker," I said, about ticker symbol [FIT] and company name Fitbit (NYSE: FIT). I said, "Yes, this has a lot of the makings. The look of a Rule Breaker." And today it's gone from $14.06 less than two years later to $5.67, or so, as we're taping. Aaron, what does Fitbit do in a few sentences?
Bush: Fitbit is another fitness company. They deal with wearable technology. They're most well-known for their wristband wearables, and they still have some other accessories, too.
Gardner: Pretty iconic when those came out, at first, weren't they?
Bush: They were. Absolutely.
Gardner: I mean, I was rocking a Jawbone, myself, and now I'm using my Apple watch. I may or may not be foreshadowing where you're heading with this, but Fitbit was a brand that, especially here in America, all of us would have recognized whether or not we were rocking a Fitbit, a Jawbone, or nothing at all.
Aaron, what is the thing that went wrong No. 1 for Fitbit?
Bush: As you alluded to, Fitbit was on fire, there, for a while. Sales were on fire, but then it flamed out. From 2013 to 2015, Fitbit sales rose from $271 million to over $1.8 billion.
Gardner: That is just amazing
Bush: It really is. And so, during that time, there was a lot of hype surrounding wearables, and Fitbit the company really was the top dog and first mover in this trend. But unfortunately, even though the products are improving, the hype today and over the past year or so just hasn't persisted, and the hype cycle's downside is sometimes tough to overcome, as it goes through that trough, there.
That said, sales have flamed out from more than just the hype, though. The market is now more competitive, which for Fitbit has meant cutting prices in order to retain market share. And it turns out that their retention rates are actually very low, and so people are not seeking upgrades at the same rate that they were buying into the devices in the first place. If we look just over the past 12 months, sales are down about 30% from where they were a year ago.
Gardner: And where are sales, roughly?
Bush: Sales right now are $1.6 billion.
Gardner: So not even that much farther down from where they were a few years ago, but the growth rates have not just slowed, but they've gone negative, and that's hurt this stock very badly. Aaron, what is thing that went wrong No. 2 for Fitbit and its shareholders?
Bush: I call it "troublesome expense control." Today Fitbit is losing more money than it ever made. In 2015, Fitbit made $336 million in operating profits and over the past 12 months, the company has lost $363 million.
Gardner: So, a complete flip.
Bush: A complete flip. Night and day. And even as sales have fallen, over the past two years, Fitbit's doubled its R&D spending, and it's boosted its SG&A expenses by 50%, so they're in a bit of a catch-22 situation right now. Fitbit needs to spend a lot of money to stay relevant, but the cost of staying relevant is digging a pretty major hole in its income statement.
Gardner: Yes. Ouch. OK, Aaron. What is one thing we can look at, maybe hope for, going forward?
Bush: One positive note is that Fitbit has a lot of cash. The company has $659 million of cash and short-term investments in the bank. It has no debt. And for perspective, that cash represents about 50% of the company's market cap right now, which is incredibly high.
Gardner: So, the company's worth about $1.2 billion or so, and they've got $600 million just sitting there in their bank account.
Bush: Right. And over the past year, Fitbit's burned or lost about $50 million in cash, so at that rate, it has about a 13-year runway before all of its cash is gone. Hopefully they can turn it around, but that gives them a pretty long time compared to many other companies that are burning that rate of money to find a solution. To invest heavily in technology and to really put that cash to work.
Gardner: Aaron, thank you very much for sitting through the misery with me of two of our worst Rule Breakers. Two stocks that I personally picked for Rule Breakers members. I hate that this is true, but they're both down 60% or more just in the last couple of years.
Bush: Well, I'm happy to be here, David!
Gardner: So, there you have it. David's Biggest Losers, Vol. III. Six stock picks, all down, 60-80% over the last three years, and darn it, it's been a great three years.
As I said earlier in the podcast. this is normal, and it's hard, after slogging through 45 minutes or so of sad and bad stock picks, to remember and have that perspective, but it's going to be pretty natural for us, as Rule Breakers investors, to have losers like these.
A lot of people when they start investing, they live in fear of a single loser, or if their first stock pick drops 20%, for many people that can feel devastating. Well, you've just spent around an hour with me talking about stocks that are all down well more than 50% and these are picks made in the last few years. I hope as a fellow Rule Breaker you understand that, and you have that mentality.
And, I would be remiss if I didn't point out that we've had tremendous winners over the last three years. Naturally, we're focused on the losers this week, but in our Rule Breakers service, Take-Two Interactive is up 223% in the last few years. Planet Fitness up 177%. Shopify up 429% and 324% as I rerecommended it. NetEase up 99%. Over in Stock Advisor we've got Match Group. Match.com and Tinder up 185%. Stamps.com up 146%. Match Group again up 100% and Nvidia up 116%.
So, looking at these two services we are replete with winners. Those are just the ones that have triple-digit returns or better. We have a lot of +50%s and +60%s. I want you to know that we have -- and we should, darn it -- we should all have a lot of winners over these last three years because it's been a tremendous stock market environment that none of us should expect to be the same in 2018 as it's been in 2017, 2016, or 2015. But I will say that things have started pretty well for investors in 2018.
If you owned any of my worst picks, give yourself a minus one, this week. If you owned more than one, than feel free to add up. Minus one plus minus one plus minus one; but also make sure you put in the plus column if you heard names of any winners that you hold, and we have a lot in both Motley Fool Stock Advisor and Rule Breakers.
All right. So, a few lessons, then, to close. I think you already heard some recurring themes. You heard about some bad acquisitions. You heard in at least one case about having to restate financial statements. You heard about changing CEOs. FireEye. Synchronoss.
This is interesting. You didn't hear any biotechs this year. It's very natural. I have a lot of biotech stock picks. A lot of more aggressive medical industry companies, and none of them appeared on this year's David's Biggest Losers list. There were a few there, last year. Most years should have them, but sure enough 2017 was a tremendous year for biotech.
It was ironic to me, then, that having picked my football theme, that we would have some athletic losers, there, near the end, which reminds me to give you a few more inspirational football quotes about winning and losing.
The first one I'm going to give is Tony Dungy, the longtime NFL coach. Tony Dungy who once said, "I just think winners win. And guys who won all the way through high school and college, the best player at every level, they have a way of making things happen and winning games."
And I agree with you, Tony Dungy, and that's why we spend a lot of time looking and talking about winners, here, at Rule Breaker Investing. Because while I love doing David's Biggest Losers every year [I actually really do love doing this podcast. That's why we go extra long for this one each year]. While I love doing it, I always make this point, which is don't learn too well your lessons from your losers.
I have profited much more in life by studying what's winning. What is succeeding and learning my lessons from those things. After all, if you ended up looking at a company like Trivago [let's pretend you bought shares of Trivago], an internet play. A company doing good work and whose stock has been crushed over the last year or so, and you decided, "You know? I'm just not going to buy any internet or travel companies."
You would have missed a great stock pick like, well, Match Group that I mentioned earlier. That's an internet brand. Or within the travel space maybe you would not have bought Priceline which has been one of our greatest stock picks we've ever made at The Motley Fool.
So, my message is don't try to learn too well your lessons from your losers. Stick with me and Tony Dungy. Find those winners that do not just keep on winning but tend to find new ways to win when they need to. And in that same regard, here's one more football coach winning and losing quote. This one comes from the great Washington Redskins coach of yore, Joe Gibbs, who said, "Failures are expected by losers, ignored by winners."
And that's kind of what I'm saying. I don't think you should fully ignore your losers. After all, on at least one podcast each year we celebrate them. But I think winners tend not to get preoccupied with their losers or spend too much time, and one of the great mathematical benefits for all of us as investors. As long as you're adding to losers on the way down, which we almost never do, here, at The Motley Fool; as long as you're not doing that as stocks lose, the good news, if there needs to be any, the good news is that they matter less and less to you because they occupy less and less of your portfolio.
One final reflection. A year ago, on this very podcast, David's Biggest Losers, Vol. II, we covered two companies. GoPro, which I mentioned earlier at the time was at $9 down from $80. It was a horrendous stock pick. In the last year it's gone from $9 to $6. So, sometimes these companies don't really come back.
But at the same time, last year's podcast, we covered Restoration Hardware, which touched down the year at $30 and since then in the year intervening, Restoration Hardware has gone from $30 to $95. So, yes, sometimes they do come back. I'm not especially plugging any of the companies we covered. This year there might be one that continues to lose value. There might be one that triples from here. You know which way I'm hoping. Maybe you are, too.
But in the meantime, thanks a lot for joining with me and my fellow Fools as we talk through the losers of 2017.
Next week, something entirely different. Next week let's get back to winning. In the meantime, have a lovely week. Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of Alphabet (C shares), Apple, GoPro, Match Group, NetEase, Nvidia, Priceline Group, Shopify, Stamps.com, Take-Two Interactive, Under Armour (A Shares), and Under Armour (C Shares). Abi Malin owns shares of Apple. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Apple, FireEye, Match Group, NetEase, Priceline Group, Under Armour (A Shares), and Under Armour (C Shares). Jim Mueller, CFA owns shares of Alphabet (A shares), Alphabet (C shares), Match Group, Nvidia, Priceline Group, Shopify, and Stamps.com and has the following options: short January 2018 $135 puts on IBM and short January 2018 $95 puts on Shopify. Rick Munarriz owns shares of Apple and Fitbit. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Fitbit, GoPro, NetEase, Nike, Nvidia, Priceline Group, Shopify, Stamps.com, Take-Two Interactive, Under Armour (A Shares), Under Armour (C Shares), and Verizon Communications. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cisco Systems, Expedia, FireEye, Intel, Match Group, Palo Alto Networks, Planet Fitness, Synchronoss Technologies, and Trivago. The Motley Fool has a disclosure policy.