If I’d been kicked in the pants for every time I’ve failed to keep up with the IPO market, I’d be unable to sit down to write this article. Oh, the immensely profitable short opportunities squandered! If there’s anything to regret about Fitbit Inc (NYSE:FIT), it’s that I didn’t see just how screaming Fitbit stock was to be shorted.
I rarely short stocks, and in my forthcoming stock advisory newsletter, The Liberty Portfolio, I will not do much short selling at all. There are only three instances in which I will short a stock.
- If a company is very clearly in dire financial straits and headed for bankruptcy.
- If a company is clearly on the verge of getting whacked by an existential threat, such as a government agency coming after it. That’s the case I wrote about this week regarding World Acceptance Corporation (NASDAQ:WRLD).
- When an equity, like Fitbit stock, is clearly a fad.
The trick with fads is that it first requires a short seller to recognize that the product is, in fact, a fad. That’s not always so easy. A lot of it requires instinct. You have to be able to look at a product and first determine if it truly solves a problem. If it does, then the product is not a fad. It may be forced out by competition, but that doesn’t make it a fad.
Products that solve problems likely have staying power, whereas products that don’t are less likely to survive unless they meet some other purpose.
The next step is to identify how consumers behave. Not everyone has this ability. It requires you to put yourself in the shoes of a consumer and determine how they will respond to the product.
I look at Fitbit stock and think, “This is nothing more than a watch that counts calories, steps, heart rate and so on. It doesn’t solve a problem, and only the most dedicated of health nuts are going to use this.”
So right away, I see a niche product. Not everyone wears a watch, and unless I’m really serious about weight loss or exercise, I’m not putting that thing on my wrist all day.
Like home ice-cream makers, a fad I called correctly, wearables may be cool now, but give it time. Sodastream International Ltd (NASDAQ:SODA) had to pivot to water, which I still think won’t work. Sooner or later, Fitbit is going to become a pain to wear, and Fitbit stock will be a pain to hold. Fitbit’s aren’t exactly the pinnacle of style either.
The same is true of GoPro Inc (NASDAQ:GPRO), which only offered something cool for those on the go. That’s a niche market, and a short-term cool item. But in normal situations, the smartphone blows it away.
Yet these two concepts are still not enough to short. You also have to be really careful about shorting something like Fitbit stock. In the best scenarios, you will see a ridiculous parabolic rise in the stock. GPRO stock went from $37 to $87 in about seven weeks in 2014. SODA went from $30 to $74 over about six months.
You need to short as that parabola starts to decline a little, and short in pieces in case it surges again. Wait for a decline back toward its base and get out.
Usually there’s a second buying wave. That also happened with Fitbit stock. FIT fell back to $40 over about a four-month period. Then it went back up to $63. That second wave exhausts and then you are usually good to short for an 80% to 90% gain.
Fitbit stock, ahem, fits all the criteria of a fad. Still, that doesn’t mean it’s a zero.
An IPO will raise a lot of money, and Fitbit stock was indeed profitable with cash flow. However, it has lost money each of the past four quarters and cash on hand has been cut in half to $225 million.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.