I have a trick question for you:
How do you get a perfect 100% score on a test?
The smartest person in the room might say, “get every answer right.” Meanwhile, the class clown like me might quip, “copy the answers of the smartest person.”
Both are great answers. But today, I have a third, less-intuitive response for you:
Get zero answers wrong.
Think of it this way. If you never make a bad Moonshot investment, your portfolio will only go up. Consider these disastrous bets of 2021:
- Lordstown Motors (NASDAQ:RIDE) down 64%
- SOS Limited (NYSE:SOS) down 54%
- HUMBL (OTCMKTS:HMBL) down 86%
- Array Technologies (NASDAQ:ARRY) down 68%
If you had sold these stocks before they fell, that would have freed up thousands (or millions) of dollars to invest in Shiba Inu (CCC:SHIB-USD) or other big 2021 winners. Every dollar invested in a dud means one less dollar that can grow 1,000x.
Today, we’re going to take a look at playing defense, or how you can boost your returns by avoiding stinkers.
Rising Stars: Biotech Rises Again
Before jumping into the depressing world of stinker stocks, let’s take a quick peek at the winners last week: Rapt (NASDAQ:RAPT), Entera (NASDAQ:ENTX), Iteos (NASDAQ:ITOS), Enochian (NASDAQ:ENOB) and others. What do these companies have in common besides their seemingly made-up names?
They’re all biotech stocks that won big last week.
From successful phase 1b trials to billion-dollar agreements, these firms have enjoyed news that’s pushed their stock prices up anywhere from a third to 80%.
And it’s not just these four. Of the top-25 stock gainers last week, 16 were healthcare-related.
That’s a welcome change for biotech investors. The coronavirus pandemic made 1Q 2021 a terribly awful, no-good quarter for any biotech firm doing things besides Covid-19 vaccines. The SPDR S&P Biotech ETF (NYSEARCA:XBI) was down 4% in the first three months of the year, compared to a 13% gain in the S&P 500. The public sector wasn’t immune either; The National Cancer Institute saw its annual funding increases slashed 60% from the prior year.
Since then, biotech and healthcare rebounded. The genomics exchange-traded fund (ETF) of the ARK Funds, (BATS:ARKG), outperformed its Moonshot peers. Alzheimer’s drug researcher Annovis (NYSE:ANVS) more than tripled in price.
Picking these winners is a complex task that I’ll reserve for another day. To get you started, though, here are two conservative names that are ideal for first-time biotech investors.
TG Therapeutics (NASDAQ:TGTX). A cancer drug firm with two approved drugs and 10 other ongoing trials. A combination of 1) large market size and 2) full drug pipeline gives the oncology drug company some upside without the disastrous downside common among smaller biotechs.
Neurocrine Biosciences Inc (NASDAQ:NBIX). A neuroscience-focused biotech with four approved drugs, six Phase-3 candidates and eight others in the pipeline. Like TG Therapeutics, Neurocrine’s pipeline and broad addressable market (neurological, endocrine and psychiatric disorders) make it a stable holding for a first-time biotech investor.
We’ll revisit these ideas in the coming weeks.
Falling to Earth: Companies Accused of Fraud
Back to getting zero answers wrong.
The past three months have been rough for companies that may have tried to fool investors.
Lordstown possibly faked preorders and SOS Limited reportedly touted other people’s Bitcoin (CCC:BTC-USD) mining rigs as their own. HUMBL might have passed off product mockups as working pieces, and it looks like ARRY may have misclassified revenues to boost earnings.
These stocks sometimes win in the short run. But if your business is in trouble (like GameStop’s (NYSE:GME) was in March 2020), I’d rather management come clean and let me buy shares for $4 than fudge numbers and pretend nothing’s wrong. Not only is that dishonest, but these stocks tend to be terrible Moonshot bets.
(Note that puffery is different from outright fraud. Tesla (NASDAQ:TSLA) might have exaggerated its ramp-up expectations back in the day — i.e., puffery — but they didn’t push fraudulent numbers when they missed the goals).
So, how can you avoid these stinkers?
The first thing I look for is Moonshot investments without good technology. Solar-based companies like Array might sound like a sexy bet on clean-tech. But anyone paying close attention will realize that the firm only produces the low-margin motorized racks that turn the panels. I’ve used this method to highlight other dud bets like Hyliion (NYSE:HYLN), an electric powertrain company with a shockingly inefficient product.
Next is financial quality. Are these companies collecting cash for the revenues they say they’re making? Anyone checking Lordstown’s cash flow statement (or their preorder page before their do-over) would have immediately realized you could put in thousands of “letters of intent” without a down payment.
In other words, cash is king, even for Moonshot bets.
Finally, there’s a gut check. Consider battery developer QuantumScape (NYSE:QS). The firm’s CEO, Jagdeep Singh, has long touted its close relationship with Volkswagen (OTCMKTS:VWAGY), but the legacy automaker has been busy developing in-house capabilities without Mr. Singh’s help. If something feels wrong, trust your instincts. It’s better to pass a Moonshot opportunity than to bet big when something feels off.
If you’re not entirely sure which ones to stay away from, here’s a list to get you started.
- Clean Energy Fuels Corp (NASDAQ:CLNE). Announced that the Amazon.com (NASDAQ:AMZN) fuel supply agreement only covered 46 of 565 stations. The news led to a 21% share price loss and its largest shareholder dumping stock.
- Clover Health (NASDAQ:CLOV). Active DoJ investigation into possible kickbacks and questionable third-party deals to drive insurance signups. Medicare Advantage is already a tricky business. It’s even harder when you’re accused of violating the Stark Law.
- Workhorse (NASDAQ:WKHS). Hype of the USPS deal sent shares spiraling when the EV maker lost a contract to OshKosh (NYSE:OSK). Apparent self-dealing with former CEO Steve Burns also stripped Workhorse’s public shareholders of the company’s most valuable R&D prototypes.
- XL Fleet Corp (NYSE:XL). A questionable sales pipeline suggests this plug-in hybrid company may become the next Lordstown. Its low deferred revenue (i.e., preorder payments) could mean management has exaggerated much of its $220+ million supposed pipeline.
Interesting Reads: Risk, Reward and Dividends
High risk, higher reward? Louis Navellier and his team pick out eight risky stocks that could benefit from the next round of economic growth.
Sometimes, growth stocks can pay strangely high dividends. Bob Ciura of Sure Dividend picks out several of his favorite pet stocks that are benefiting from the pandemic puppy boom (and also flinging off cash dividends).
Are you looking for the potential “Walmart of Cannabis?” Luke Lango and his team write about one of Canada’s largest marijuana dispensaries in an article that looks to separate the hype from the real potential.
Thomas Niel considers Holo (CCC:HOT1-USD), an extreme long shot that could be worth a bet. Not only could this “Ethereum Killer” upend current cryptocurrencies. Mr. Niel argues HOT could become a blockchain alternative as well.
By the Numbers: Avoiding the Loser’s Game
|$149.29||Average per-person amount lost by Las Vegas gamblers per day, according to David Schwartz, former director of UNLV’s Center for Gaming Research.|
|$3.3 billion||Amount lost to imposter scams in 2020, according to the FTC.|
|$3.8 billion||Cryptocurrency stolen in the same period last year. Cryptocurrency has emerged as the “Wild West” of finance, according to the FTC.|
|$19.3 billion||Nikola’s (NASDAQ:NKLA) market cap loss since its peak last year. Short-seller Hindenburg accused the firm of inflating expectations in an “Ocean of Lies.”|
Closing Thoughts: It’s Hard to Be a Contrarian
We Moonshot investors are essentially an independent bunch. Buying $500 of Dogecoin (CCC:DOGE-USD) isn’t what “ordinary” people are supposed to do.
But walking to a different tune can feel awkward and terrible sometimes. No one wants to be different from friends, let alone tell anyone they’re wrong. That’s one reason why so many Wall Street firms mimic their peers when making concentrated bets.
My suggestion? Keep on investing in Moonshots, but reduce your bet sizes in companies accused of fraud. Of course, no one on Earth can score 100% on every investment. But you can certainly do better than the crowd by avoiding some of the worst mistakes they make.
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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.