I don’t have too many set rules about investing. I have guidelines I follow, but set rules are just too restrictive.
Most of the time, it’s about finding the relative value in the market. What’s relative? It’s what looks like a bargain and what’s hated compared to everything else.
While sometimes I can find some hated blue chip that’s temporarily out of favor, I feel that I’m not really doing my job as an independent, market-beating financial analyst unless I find a few trades a year that are really out there.
The kind that make people think I’m crazy.
What can I say? I just view things differently than others, and that’s where it’s possible to find value.
Sometimes, though, it also pays to invert this view. That means looking at relatively overvalued stocks in the market that are ripe to decline.
Case in point: Last April in this blog, I wrote about a company that was likely to decline and lose shareholders money.
It was a company that didn’t make money. Normally, that fact alone would cause a consensus that shares were overpriced. But this company had a cult following around its CEO, similar to how Apple (AAPL) could do no wrong once Steve Jobs was back at the helm.
So, without naming names, in the 13 months since this warning blog was issued, this nameless CEO has done a lot of things to ensure shareholder value would be destroyed. In fact, what seemed like terms too controversial last year now seem too tame this year.
This nameless CEO posted on social media that funding was “secured” to take the company private at $420.
For a company that needs to focus and pump up production, these moves indicate a distracted CEO. Distracted CEOs, nameless or not, are terrible for shareholders. Without a focus on doing what’s best for shareholders or the company operationally, progress won’t be made.
It’s no surprise that the company is looking ugly. Shares are down over one-third from a year ago.
Even worse, the company has had to raise capital in the markets, diluting the ownership stake of existing shareholders even further. Operationally, the company has been stuck in neutral. A few die-hard supporters remain, but support is much quieter than it was just over a year ago.
Look, as an investor, I prefer to profit on the upside, from a thriving and growing company. I take no pleasure at being right when a company in terrible financial shape is run by a P.T. Barnum-esque CEO more interested in getting into flame wars on Twitter (or selling actual flamethrowers) than running a publicly-traded company with a modicum of competence.
But it’s my job to look out for folks, particularly those who might have been dazzled into investing into any Edsel of a company about to sputter out and destroy shareholder value.
I may even be wrong, if enough folks with capital believe in the company and throw more good money after bad. That seems to be the case, as this company announced that it was seeking more financing this week. The financial house of cards will continue for a while longer before I see it collapsing, it seems.
A misleading CEO creates billions of dollars in lost capital, not to mention the opportunity cost of where that capital could have gone instead.
Sure, this is a company that had a great story a few years back. But that story has been eclipsed by the CEO’s antics and by how competitors have moved into the space in a more economical and profitable fashion.
What was once a crazy trade now seems like the right trade, meaning it’s time to look for the next crazy trade elsewhere.
Last year, someone bullish on this disaster of a company commented on the original blog: “I love your confidence, keep talking and give me your money.”
No thanks! I’ll happily keep making money for myself and my readers by providing them with the best independent financial analysis. You’re free to disagree as much as you wish. But I will say that nothing in investing, like life, is static. Today’s victory lap on the short side may be a sign that there’s more upside here than downside now.
I may be early when I look at the facts, and Mr. Market may very well give me a thrashing from time to time. But eventually, armed with the facts, I come out ahead, as crazy as it seems.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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