If a time-traveler appeared in December 2019 to warn investors of an unavoidable worldwide pandemic, what would you have done? Move entirely to cash and gold? Or dive headfirst into high-flying, zero-profit tech investments like Nio (NYSE:NIO) stock?
In a year where the stock market has seemingly divorced itself from the grim realities of the novel coronavirus, investors have grown complacent in buying marginal companies. As long as the stock kept going up, people didn’t even bother questioning red flags like weak accounting or self-dealing.
This is the context that I’ve re-emerged from my semi-retirement in trading this year. And as rusty as things started, I’ve since regained that presence of mind that comes with trading practice. It’s like riding a bicycle, except a bad accident will lose you a figurative arm and a leg rather than a literal one.
So, before those holiday parties cause us to drunkenly fall off our bike, here’s my year-in-review of the best and worst calls I’ve made this year.
Best Call of 2020: Buy PLTR Stock
All traditionalist growth investors generally look for some variation of four elements: a growing market, a proven technology or founding team, a decently capitalized balance sheet and a reasonable valuation.
And the good news is this: the formula still works.
When Palantir (NYSE:PLTR) went public in September, the company looked like an ugly duckling of tech investing. The secretive firm started its life as a CIA contractor. Even today it remains relatively unknown outside Silicon Valley and Washington D.C. circles. Shares were decidedly cheap.
Yet, the company has grown like wildfire in the fast-expanding world of data analytics. It has even begun to invest more in its sales team — a grudging realization of the need to prioritize profits as well as engineering perfection. So, when shares dipped on insider selling, I recommended buying into that golden opportunity. Since then, PLTR stock has almost tripled. Never mind the company’s high-profile contract win from the U.S. Food and Drug Administration this month. The $44 million is small potatoes compared to the day-to-day expansion the company has managed through developing superior technology and recruiting some of America’s most outstanding engineers.
Worst Call of 2020: Sell NIO Stock
Yet, this methodical style of growth investing has fallen by the wayside this year. In the mad rush to find the next Tesla (NASDAQ:TSLA), investors have bid up various cleantech industries from electric vehicles to solar. And nothing makes more incredible idiots of investors than easy money.
While most investors used to at least pay lip service to the four hallmarks of classical growth investing, many today actively reject the notion altogether. For them, Warren Buffett and his contemporaries look like a relic of the 1990s. Today, if the stock has been going up (and it looks enough like Tesla), then it’s a buy.
There is some proof to momentum investing — studies have repeatedly shown that growers continue to succeed. But when five electric vehicle companies are worth almost as much as the twenty other automakers combined, something is clearly wrong.
That brings me to my worst call of 2020: sell Nio stock.
In September, I wrote that Nio stock isn’t the next “Tesla of China,” a view echoed by another long-time tech investor, Al Root, at Barron’s earlier this week. But I forgot to mention one thing clearly: even if Nio won’t become the next $600 billion company — the value of Toyota (NYSE:TM), Volkswagen (OTCMKTS:VWAGY), Daimler (OTCMKTS:DMLRY), GM (NYSE:GM), BMW (OTCMKTS:BMWYY), Ferrari (NYSE:RACE) and Honda (NYSE:HMC) combined — it doesn’t mean it isn’t the next BYD (OTCMKTS:BYDDF).
And rocket ahead it did. Since my September article, Nio stock added $50 billion to its market capitalization before dropping 25% in November. Friends and co-workers alike would wax lyrical. My Tipranks score, a public record of my stock calls, plummeted as I continued to refuse pushing readers to buy speculative companies. How much do we outsiders genuinely know about the Weilai brand’s popularity within Mainland China? Or what the firm’s production agreement with JAC means for profitability? Or how much accounting irregularities at rivals Li Auto (NASDAQ:LI) and XPeng (NYSE:XPEV) should worry us?
But, in the world of investing, wrongly timed calls are still plain wrong.
Other Lessons From 2020: Buy DASH
I’ve taken my lumps with a dose of introspection. Momentum has always been a part of growth investing, and anyone who ignores that will miss out on big winners. I was just slow to recognize that market forces would take that principle to such an extreme in a pandemic-ridden year. Ask any retail investor what they want in 2021, and all will say “to earn high returns.” Risk management be damned.
That’s why, when DoorDash (NYSE:DASH) went public last week, I predicted prices would skyrocket. But doing so meant ignoring traditional discounted cash flow (DCF) models entirely.
DoorDash isn’t actually a healthy company. Although the food delivery business has benefited from stay-at-home orders, DoorDash fights tooth and nail against Uber’s (NYSE:UBER) Uber Eats and GrubHub (NYSE:GRUB) for market share. Profits in the industry have been notoriously low since 2015 when the industry switched away from a “platform” model to a “gig-economy” one. GrubHub, the only other pure-play U.S. delivery company, is worth just $6.5 billion today.
But don’t stand in the way of a raging bull market. On opening day, DoorDash’s stock almost doubled, pricing the new company at $56 billion. Even when adjusting for sales, that’s three times more than GrubHub’s valuation.
Will the company succeed in the long term? Well, probably. When it comes to growth investing, never miss the forest for the trees. But will the company, using an 8% discount rate, be worth $100 billion by 2027? That’s far harder to square away.
What’s Next for 2021?
Few investors have the skill or luck to call market tops consistently. But that hasn’t stopped people from jumping into sought-after companies this year with the expectation of selling out before the peak. Today, Tesla’s valuation is ten times larger than Amazon’s (NASDAQ:AMZN) was at its 1999 peak. And even tech stalwarts like Microsoft (NASDAQ:MSFT) trade at twice their typical levels.
As we head into 2021, this much is clear: Investors should tread carefully — momentum investing works until it doesn’t.
I’ll keep telling you all about great stocks as I come across them — companies like QuantumScape (NYSE:QS) and Novavax (NASDAQ:NVAX) all have incredible long-term potential if only they can perfect their IP. But these aren’t the firms you throw your entire life savings at. Instead, your most significant allocations should involve disciplined bets and a long-term outlook. It’s the skills that let me move away from trading, and it’s the foundation that will keep your portfolio from collapsing when times inevitably get tough.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.