Picking Individual Stocks is Hard

Picking Individual Stocks is Hard

Over the past month, two of my favorite company stocks have continued to catch a beat down – big time.  Those two companies are Under Armour and Chipotle.  (Full disclosure: I do not and have never owned either of these stocks.  But I do love both company’s products.  I wear an inordinate amount of Under Armour gear for golf and eat at Chipotle on a regular basis.  So, to say I enjoy them would be an understatement.)

In 2017, Under Armour is down approximately 56% (after being down almost 30% in 2016) and Chipotle is down approximately 27% (after being down almost 21% in 2016) while the S&P is up over 17% (after being up almost 10% in 2016).

Watching these stock’s recent performance was a reminder of a few things.  For one, to make money in individual stocks, you must time your entry AND exit points correctly.  Second, there are the stock fundamentals and then there are stock narratives or stories.  Your entry and exit points must coincide with the stock narratives and fundamentals.

The story of these two stocks is fascinating to me, not only because I love both company’s products, but because both were darlings of the stock market for quite some time.  Both had good fundamentals in terms of growth (albeit high p/e ratios throughout), and both quickly fell out of favor.  The narratives ran until they just didn’t anymore.

For Chipotle, the downturn started with a change in the narrative that impacted the fundamentals.  Was the norovirus health scare a country-wide epidemic?  The fundamentals followed as sales decreased dramatically after the news.  Then the narrative further evolved into whether people are just getting tired of their food.

For Under Armour, the downturn started with a change in the fundamentals that impacted the narrative.  Sales slowed first, then people pointed to their lackluster design and leadership as the potential problems.  Are UA clothes suddenly not ‘cool’ anymore?

Where I’m going with this, is that it would have been easy to purchase these stocks at all-time highs believing that they were fool-proof investments.  Few people would have questioned your investment at the time.  To say you’d be regretting these stock purchases would probably be an understatement.

You could have also purchased either of these stocks for the first time or doubled down on your initial all-time high purchase at one of the many false bottoms for either company.  At the time, this would have seemed like a smart decision because they were hitting lows (going on sale, so to speak).  And if you still believed the narrative, few would have called you crazy given their recent darling status.  Hindsight being 20/20, both would have been awful decisions.

I’m not saying that these stocks are dead or that an imminent recovery is on the way.  The future remains to be seen as to whether these companies turn the corner again.  What I am saying is that being right about an individual stock is just a really hard thing to do.  You need to be right about your entry and exit points and be right about the narrative and fundamentals.

My version of the narrative is simply don’t try to pick stocks at all.  Instead, spend the time you currently spend evaluating stocks with your family or reading for leisure or whatever.  Or do like me, invest in index funds and still research stocks for the fun of it.  These two stories, as tragic as they’ve been for many investors have been fun to watch, but much more fun from the sidelines.

 

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