After weeks of exhaustive research uncovering the industries and companies that are in the most trouble right here, right now, I’m proud to release my latest investment book at BrokenBusinessModels.com or get it free with your paid subscription to TradingWithCody.com.
Every business, no matter how great, at some point becomes not so great. Technologies change, laws shift and secular progress will take place regardless of how hard you try to stop it. And lest you think that you’re smarter than the average bear and will always recognizes problems, take the case of one Warren Buffett.
In 1970 the Sage of Omaha bought Blue Chip stamps, a company that issued loyalty rewards that companies could hand out to customers to incentivize them to keep coming back. Warren has remarked “When I was told that even certain brothels and mortuaries gave stamps to their patrons, I felt I had finally found a sure thing.” In 1970 there were 60 billion stamps in existence and the company had $126 million in revenue, about $700 million in today’s money; by 2005 that was down to $25, 920. That’s barely enough to charter one of Berkshire Hathaway’s Netjets for a weekend, let alone move the meter on a company with $100 billion in revenue. If Warren Buffett, the most legendary stock picker in history can make the mistake of not seeing where the world is headed, so can anyone.
Don’t despair though, there are ways to get through this. There are always signs when a business is headed downhill, such as whether they can’t pivot to a new technology, or management is stubbornly convinced that they need to fight old battles. Over the last couple years finding short cases has become an increasing part of what I do and we’ve had several substantial winners. In the case of A123 systems I targeted a company with a blazing hot IPO that was nothing more than shell to funnel off taxpayer money. Here’s what I said in December of 2010, before AONE’s 75% decline.
In the case of Lender Processing Services (LPS) we spotted a company that was not acknowledging the huge legal cliff is was about to run off. In this report we talk about a company very much related to LPS that we think can match the 55% fall its seen since first wrote about it.
With Research in Motion (RIMM), the case is very different, they actually make a useful product and are amazing innovators (the co-founders practically invented mobile email). But their refusal to accept that Apple had built a product that everyone wanted cost their shareholders ten of billions of dollars. When I first told the readers of my book “50 Stocks for the App Revolution” to stay away from RIM the company hadn’t yet begun its 75% slide.
Why is all this so important right now now? First off, there is no such thing as a bad stock, just bad a price. At some level everything has value, it all depends what you pay for it. But in all the cases I’ve outlined, the market is still willing to support these broken businesses, often at multibillion dollar valuations. If you look at some of the metrics I’ve pulled for you you’ll see some big cash flows and fat dividends; unfortunately for these stocks those numbers reflect a past reality, not the shifting future. The stock market is the ultimate objective judge and arbiter of value and the point is that we can make money getting out of and getting short these names before everyone else gets it.
But that alone isn’t enough; bad businesses can stay expensive for years—just ask anyone who tried to short the housing bubble before it ultimately collapsed. Timing is everything and because I think the timing is right, I am going to be adding a couple new short ideas to the Revolution Investing portfolio over the next couple issues.
In fact, I’ve just completed a brand new investment book called: The Dirty Dozen: 12 Stocks with Fundamentally Broken Business Models (the full report is available for $79 at http://brokenbusinessmodels.com) because I want to target the most obvious losers of the new world. We are at the crossroads of huge technological, financial & regulatory shifts, many of which are well past their tipping point. Enormous tectonic moves have already taken place and lots of the low-hanging fruit has already rotted (think Blockbuster, Fannie & Freddie) but there is so much more yet to collapse.
The world is never going to back away from iphones and remote data, so you need to avoid companies that are clinging to revenues that will be disrupted by the App and Cloud revolutions. You need to avoid investing in financial companies that have been living off the fat of government welfare and by exploiting the poorest in society; their ability to leverage shady practices is coming under more scrutiny than at any time in the past 50 years. And most of all you need to protect yourself from complacency and think about your portfolio of stocks in terms of owning whole businesses. Given the entire spectrum of the investment world would you really want to be the CEO of a student lender? A radio analytics company? A financial company that can be regulated out of existence?
I wrote this book to help you avoid industries and businesses that have seen the world pass them by, and to make money by getting short uninformed optimism. You can get it for $79 at BrokenBusinessModels.com or for free with your paid subscription to TradingWithCody.com.
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