by James Brumley | September 25, 2012 7:45 am
Have you ever found yourself so enamored by a product that you said you’d invest in the company if you could? Well, as it turns out, you probably can invest in a company more often than you think.
On the other hand, just because you or someone you know has said “That’s a million-dollar idea!” doesn’t actually mean the company that makes said great product is also a great investment. Indeed, sometimes they’re very, very bad investments.
And yes, I’ve got a few in mind.
I’ve been working in and around investments for over a decade, as a broker, as an analyst and as a journalist. I’ve never not seen this mistake while performing my job in any of those capacities. The only thing that amazes me is that nobody seems to learn from the mistake, despite seeing it repeated over and over again.
That mistake? I described it with my self-coined and trademarked phrase “conceptual investing,” but you might have heard it described as “story stocks” — equities that capture the hearts and minds of traders because the concept of the product or business model is so cool, it just has to be profitable.
Not all of them end up being great ideas when the rubber hits the road, though. The Edsel and e-commerce website Pets.com come to mind.
Facebook (NASDAQ:FB) is a more recent example of a poor concept-based investment. The site still gets a proverbial ton of traffic every day, even if its growth rate is slowing. It’s still a rarity for anybody to click on one of its ads, however.
In May, when Facebook was going public, that lack of clicks on its banner ads was a minor detail compared to the fact that Facebook was an ultra-cool site that consumers loved to visit. Now, with the stock trading at about half of its IPO price, it’s becoming clear that a concept doesn’t actually pay the bills.
Had investors really crunched the numbers for Facebook then the way they’re going to crunch the numbers for Facebook a year from now — when the novelty wears off — it’s unlikely investors would have been clamoring for it the way they did.
If only Facebook were an isolated case. But, conceptual investing has recently burned a lot of other folks too, via Green Mountain Coffee Roasters (NASDAQ:GMCR) and Primo Water Corporation (NASDAQ:PRMW).
The Green Mountain Coffee Roasters story is a relatively well-known one … now. The maker of the famous Keurig single-serve coffee maker watched its stock rally from $33 per share at the end of 2010 to a peak of $116 by September 2011, all because sales of Keurig machines were going hog wild.
“Hog wild” is a relative idea, however.
While David Einhorn has largely been credited with the stock’s implosion in the latter portion of 2011, he can’t get all the credit. The fact that the stock was trading at a P/E in the 100s around that time had a lot to do with the meltdown, too. It’s just that valuations didn’t matter while the stock was skyrocketing and consumers became enamored with the clever device. Once the market realized that even a stunning amount of sales growth couldn’t justify the stock’s price, Green Mountain Coffee Roasters shares never even attempted to revisit those highs.
Primo Water Corporation is another case of problematic excessive expectations.
The company — which simply facilitates a self-serve water-cooler refill business — was all the rage leading up to and shortly after its IPO in November 2010. And why not? Though simple in concept, landfill-conscious and health-oriented consumers saw Primo as a way to help the environment as well as a way to enjoy sparkling, clean, filtered water. It just wasn’t a way to make money. Primo Water has yet to turn a profit, and doesn’t look like it will anytime soon.
It’s not just names you’re familiar with that never seem to be able to live up to expectations, however. There are some great companies with wonderful products that you might not have been realized were publicly traded that are habitually disappointing investors.
Tootsie Roll Industries (NYSE:TR) is one of them. Yes, the iconic candy is its own brand; the corporation sells about half a billion dollars worth of the chewy chocolate every year. It even manages to turn about 9% of that revenue stream into net income. Unfortunately, Tootsie Roll hasn’t been able to turn any of income into something sweet for shareholders — the stock is right back where it was at this point in 2003.
Winnebago Industries (NYSE:WGO) and Sealy Corporation (NYSE:ZZ) also make the list of companies with a product people like, but a corporate performance that’s easy to hate.
To give credit where it’s due, Winnebago makes the best (for the money) RV on the market. Better still, with something of a recovery unfurling now, purse strings are loosening a little, and sales finally have started to stabilize at levels above 2009’s lull. Shareholders are seeing a light at the end of the tunnel, with the stock rising over the past 10 months. But, given the status of the brand name and quality of the product, it’s painful to see the stock still is priced at about a third of its pre-recession value.
And Sealy? Sealy is second only to Sleep Number Beds when it comes to mattress market share and popularity, and considering Sleep Number Bed-branded beds sell for more $4,000 and up, we can safely say that Sealy is the top-name in non-specialty mattresses. Yet, that hasn’t helped the company make more money than it has lost since 2007. The stock has been miserable to own during that time, too, still down nearly 90% from that early 2007 peak.
Pretty simple: Just because something seems like it should be a “million-dollar idea” doesn’t mean there’s actually any investment value to it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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