What we can learn from these 5 losers

If there's more to learn from losing than from winning, a look at the following stocks is very instructional.

By MoneyShow.com May 16, 2012 9:26AM

By Timothy LuttsCabot Wealth Advisory

I don't typically write about failures in these columns. The mass media give you enough bad news. But this time I'm making an exception. This time I'm going to analyze five once-popular stocks that hit new lows last week.

Why? To teach you a lesson, of course. Typically, we learn best from our own failures, but that can get expensive in this business. So instead we'll try to learn from the failures of others.

Ctrip (CTRP) was once touted as the Expedia (EXPE) of China. Smaller and faster-growing, the company racked up a perfect 10-year record of growth in revenue and earnings. Cabot Top Ten Trader did very well with the stock in 2009.

But the stock's upward momentum slowed and eventually reversed, and in 2011 there were several technical signs to exit. The chart made lower highs and lower lows, and there were gaps down in May, July, and November.

If you had sold after the first gap down, you would have sold at $44. If you waited until the second gap down, you would have sold at $40. And if you'd waited until after the third gap down, you would have sold at $30.

Lesson: A huge gap down, especially on earnings, is never a good thing. It's a strong suggestion to sell. CTRP is now trading at $20 a share. Earnings estimates are being reduced. And there's growing talk of rising labor costs and increased competition.

Diamond Foods 
As of September 2011, Diamond Foods (DMND) -- the maker of Diamond nuts, Kettle potato chips, Emerald snacks, and Pop-Secret popcorn -- was flying high. It had received approval to buy Pringles, had reported record results for fiscal 2011 and had raised guidance for fiscal 2012.

Then the trouble started, with a question about the legality of the company's non-GAAP accounting methods, in which it prepaid walnut growers for their future harvests.

If you had sold after the company's first explanation of innocence (Oct. 3), you would have sold in the $70s. If you had sold after the stock's first big gap down (a month later, on Nov. 2, when Diamond announced a delay of the Pringles deal), you would have sold at $50 a share. If you waited until news of the SEC investigation surfaced, you would have sold the stock at $26. And if you had waited until the Pringles transaction was actually canceled (February), you would have sold for $22 per share!

Lesson: Just as there's never only one mouse or one cockroach, there's seldom just one piece of bad news. It often snowballs. And once that trend gets going, it generally goes further than originally expected. DMND is now selling at $21 a share and pursuing strategic options like being acquired.

First Solar
First Solar (FSLR) led the top-performing solar power sector in 2007, soaring from $30 a share to $267. Cabot Market Letter subscribers bought in March and saw profits as big as 456% (they were advised to take some profits off the table on the way up) before the stock rolled over in 2008.

Revenue at First Solar has grown every year since then, and the long-term future for solar power remains bright. But all this time, competition has been growing, putting pressure on prices.

FSLR traded sideways for most of 2009, 2010 and the first half of 2011, generally trading between $100 and $150. And then the bears took control, pushing the stock down and down and down. It's now trading under $18, and the sellers are still in control.

Lesson: He who was first will often be last. And once a big winner rolls over, the power of the potential sellers exiting that once-hot stock can overwhelm the power of potential buyers. By many measures, FSLR (now trading 88% off its highs!) is a great value here, but of course people have been saying that for the past 100 points of the stock's decline.

Sony (SNE)  was the big dog in consumer electronics once upon a time. In fact, I remember buying three big bulky Sony TVs when my wife and I added to our home in 1995.

But there's a new big dog in town now named Apple (AAPL), as well as myriad smaller competitors. So even though Sony had record-high revenue in 2011, earnings have been challenged after they peaked in 2008. As a result, institutional investors have been exiting the stock for years. It's now 45% off its high.

Lesson: Even the best-managed company eventually matures, and as it does, institutional growth investors move to faster-growing, younger stocks. If you're a growth investor, you shouldn't hang around the senior citizens center -- you should prospect at the high school.

Your online doctor, WebMD (WBMD) is a free source of information on what ails you, or (ideally) on how you can minimize ailments. It has a perfect 10-year record of revenue growth, as well as great name recognition in a crowded, competitive field. But earnings trends have never been steady, and now they're in trouble, with estimates being reduced.

The problem: Advertising dollars are fading, reduced by cutbacks on drug ad spending and migration of the spending to social networking sites. Shares of WBMD topped at $59 last summer. Now they're down to $22, having lost an impressive 63% in 11 months as investors left WBMD like rats deserting a sinking ship.

Lesson: Don't confuse the company with the stock. While you might like the website and note that business continues to grow, the stock, looking ahead, tells a different story. (Also, WBMD has had five notable gaps down since last summer.)

Now let's see if we are able to apply any of these lessons to a present-day popular stock that is losing its way.

Green Mountain Coffee Roasters
Green Mountain (GMCR) was a great hot stock for Cabot Market Letter in 2011, with profits topping 80% in just six months. We sold our final positions in October at $70 as the stock was gathering downside momentum.

A month later, it sank to $34, which proved to be a floor for five months. Then, just last week, the stock plunged 48% in one day as expiring patents and looming competition from Starbucks led management to lower its guidance.

Now some folks are asking whether GMCR is a bargain here, 77% off its high. Looking at the lessons above, what can we say?

  • One, a gap down is never a good thing. This is GMCR's fourth gap down since November.
  • Two, there's seldom just one piece of bad news. This wasn't the first, and it's unlikely to be the last.
  • Three, he who was first will be last. After a very profitable 10-year uptrend followed by the stupendous performance in 2011, GMCR still has lots of downside potential left. Note: the fact that it's already down 77% doesn't mean it can only fall 23% more. Nope, it can still fall 100% from here (though we're not predicting that).
  • Four, even the best-managed company matures eventually. This is probably the least applicable, as I think Green Mountain has plenty of growth ahead. But I could be wrong!
  • Five, don't confuse the company with the stock. Feel free to keep drinking the coffee, but don't let the steam from that brew cloud your vision. GMCR's trend is down, and the odds are the downtrend will go on longer than most investors currently imagine.

More from MoneyShow.com

May 16, 2012 3:10PM
Apple is not the replacement of Sony.   Samsung is.   I remember when Sony made brick cell phones, now they are absent in the market.
Feb 5, 2014 7:23PM
Sony is still producing phones, they haven't stopped. Not to mention all of the other computer hardware they are constantly developing. I own come Sony headphones and the sound quality is amazing, not to mention that they were cheap. I love Sony.

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