The Great Wall Street Marketing Machine: How To Protect Yourself From The Hype
Summary Wall Street firms, Research analysts, CNBC, Ratings agencies, and Brokerages have one job: Sell you, John / Jane Q public, overpriced stock just before its “best before” date. Sales efforts always intensify near major market inflection points, both to sell you stock, and keep you from selling your existing hyped stocks (before they do). The more they promote a stock as being “world changing”, “unlimited potential”, “new paradigm” and such terms, the faster you should run from investment. The later in an investment cycle we are (like today I believe), the more cautious you should be about all high valuation / beta / “future potential” stocks. Watching a group of high-beta leaders can provide an early window into future, broader “risk on” appetite. Canaries in the coal mine. “Those who tell; don’t know, those who know, don’t tell” Or maybe those who tell….are being purely deceptive. This article is a follow-up to my May Article, “What Wall Street Doesn’t Want You To Know: The Foolishness Of Chasing The Most Popular Themes”. I strongly encourage a review of that article at this time. In that article I led with the following points: Summary As Warren Buffett opines, in the short run, the market is a voting machine, and in the long run, it is a weighing machine. The analyst community and many investors who follow it are so often late to the party regarding a popular stock, and so are doomed to long-term underperformance. Wall Street is not a friend of the individual investor. Early-stage investors and insiders use aggressive Wall Street buy ratings to offload positions bought at an earlier stage. The best way to outperform – focus less on the popular theme and more on the next sector rotation in the market. Remember this Core Value: Wall Street firms, Research analysts, CNBC, Ratings agencies, and Brokerages; including the vast, vast majority of Financial Advisors have one job: Sell you, John / Jane Q public, overpriced stock, IPO’s, “special products”, and leveraged loans and debt offerings, all just before their “best before” date. They are not your friend and ally! Accept this fact and take personal responsibility for self-education, and you will avoid future large losses, accompanied by those infamous words “No one could have seen this coming”. Yeah, Right. In this article, we will examine case studies of various high-potential stocks, and how their story and performance have evolved, from the peak period of excitement to today. It is my goal to raise awareness of how the Wall Street marketing machine works, and how one can defend themselves against being swept up in the hype, through a skeptical eye, close focus on the integrity of management, and thorough, common-sense research. Note: Y Charts are not working. I’ll attempt to add later. CASE STUDY #1. GoPro (NASDAQ: GPRO ) GoPro went public in July 2014, first traded at $30.00 and rapidly rallied to over $95.00 by September. What is notable was the accompanying commentary and related world view on this company promoted as fact at that time; which is the purpose of these studies. Whenever at $80 – $90 and above questions came up about valuation for this mobile action camera maker, the answer was simple from the many promoters: “It’s not a camera maker – it’s a Digital Content Platform, acquiring high quality Video that can be Monetized for Billions of dollars by GoPro – therefore its growth potential is Unlimited and it Can’t be valued as a Camera Maker” It’s becoming a “movement” according to FBN , just prior to its highs. Along with a charming and “cool” CEO, note the exciting language often used by Wall Street: CEO has an awesome vision; Digital Content Platform; Content to be Monetized; Growth potential is Unlimited; Valuation metrics are different. (than everyone else) Sounds exciting, doesn’t it? Too bad the stock makes one want to shoot a GoPro horror movie. It is currently making post-IPO lows in the $28.00 area, with no support in sight. What’s FBN saying now about the stock? Still trying to suck you in. Think you should ever listen to FBN again? Makes you wonder what conflicts we may not know about. Others are throwing in the towel. Perhaps they have less conflicts, or have had enough embarrassment. Kind of late though isn’t it? Ironically after a large wave of downgrades, GoPro may be a better risk for those inclined, as the Wall Street hype machine…changes channels. Case Study #2. Shake Shak. (NYSE: SHAK ) Shake Shak is a New York-based burger chain that went public to amazing levels of hype, as if the hamburger had been invented. It ran from its IPO range in the $40-50 area from February of this year all the way to – again – the $95 area, and has been selling off since, threatening now to break its post- IPO lows, not an uncommon theme these days. The problem with Shake Shak and many New York IPOs is, while due to the huge and dynamic population in the New York Metro area, there is room for many, many successful ideas of all kinds, that are not necessarily transferable at the same growth rate to Topeka, Kansas, or anywhere else. This is where the Wall Street hype machine gets into gear. Take a modest sized, wildly popular – partly because it’s “new”, and adventurous New Yorkers love new, cool things – NYC-based burger chain, extrapolate its growth rate and valuation per store. It was something in the area of $15 million, far, far greater than McDonald’s by many orders of magnitude – across the entire nation – and take it public! So with my family, I did some personal research. On my next trip to New York, I went to….Shake Shak. It’s a burger place. I was frankly underwhelmed when considering the quality in the context of the hype level. There are a lot of good burger joints. This stock I could see surviving, as I can GoPro, but both at much lower prices than today’s, as the hype machine fades in light of results typical of a…Burger joint! And ultimately…it should be valued as such. See folks, for every Chipotle (NYSE: CMG ) there are a hundred, a thousand busts. If turns into the next , I don’t need the hype to convince me. Their organic growth will prove it over time. The Street thinks SHAK is a great deal. Too bad, insiders don’t think so. This massive insider offering – at post-IPO low prices – is a massive red flag, ‘get out now’ signal. Not that Wall Street will ever tell you that. Their job is to “hold your hand” so you don’t sell! Do what I say, don’t watch what I do. Wall Street’s Motto. Case Study #3. Tesla (NASDAQ: TSLA ) Talk about a hype story! This stock is truly the king of them all. If you invest in Tesla at today’s valuations, even its bulls will tell you, you aren’t investing in a car company, at car-company valuations. The first trick Wall Street uses is simply change the label. It’s not a camera company, it’s a content provider. The stock isn’t valued on earnings!!! – it’s valued on “clicks”, “unique visitors” or some other metric, because the good old-fashioned GAAP (how quaint) earnings present so ugly. Notice nobody on TV wants to talk about GAAP earnings? Tesla isn’t a car company, although it sells cars. So, what is it? It’s a new technology company It’s a revolutionary energy company It’s an environmental savior It’s changing the world Its CEO, Elon Musk, is a hero and grand visionary The inference is, you should buy the stock after each one of Elon Musk’s tweets, and pay no attention to either the valuation, or risks of this investment. This is dangerous thinking. And the stock is starting to soften as the analyst community backs off of its all-in bullish stance, just a fraction . The risk on any growth stock, or potential growth stock, may well be expressed as an inverse relationship to the amount of hype expressed on that stock. The truth is – I’m not about to start a fundamental debate on Tesla, and we have a few of those on SA if you’ve noticed – is that perhaps Tesla will live up to all of those accolades I listed above. I think the Model S is an amazing car from all reports, and I commend Elon for shaking up the industry. But admiring the (first) car, admiring the vision, does not make the stock a great investment! These are 2 very, very different discussions, and when risking hard-earned capital, pure vision is far from enough. The bottom line is Tesla is a car company. It is a young, disruptive, energizing car company, but with enormous financial risks, looking out 3 or 4 years. And so, it is only even considerable as an investment candidate, if it is valued as a car company, and carefully weighing all factors – the risks alongside the potential. There are dozens of examples, folks. The risks are high and everyone is rooting to discover the next Apple (NASDAQ: AAPL ) or Microsoft (NASDAQ: MSFT ), but truthfully they don’t come around too often. I trust this post will help evaluate the hype and story through a different lens, and help filter the noise around different opportunities we are all presented with. It’s all so much about expectation levels, and identifying when those are too high, for our chosen investment ideas. If we can do this, we can decrease portfolio risks and increase long-term results. Best wishes to all investors.