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Looking Back at David Gardner's Worst Stock Picks of the Past 3 Years

By Motley Fool Staff - Feb 22, 2017 at 7:40PM

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The Motley Fool co-founder has enjoyed much success in the market, but not even the best investors have a flawless record.

It’s not easy putting together a stock portfolio that will beat the broad market, but David Gardner has established an impressive track record. However, not every single one of his picks has been a winner.

In this episode of Rule Breaker Investing, David goes over his biggest losers of 2014, 2015, and 2016, explaining why he was optimistic about the companies, what went wrong, and how to think about them going forward.

And most importantly, David discusses why his investing philosophy -- and yours -- should leave some room for ambitious failures like these.

A full transcript follows the video.

This video was recorded on Jan. 11, 2017.

David Gardner: Welcome back to Rule Breaker Investing. It's a delight to have you with me this week.

I hope you enjoyed our Great Quotes, Vol. 5. I had particular fun, for whatever reason, doing that podcast last week, and I think some of you tweeted back out that you enjoyed it, too. Sometimes when I have a lot of fun, it means it's going to be a better show, and maybe I need to keep that in mind.

I'm going to try to make this one fun. This is a horse of a different color this week, because this should not be fun, by all rights. This should not be fun, because I'm going to be spending this week's time, together, reviewing my three worst picks in the past three years for both my Rule Breakers service and my Stock Advisor service. So this is David's "Biggest Losers".

Now about a year ago, I think I did a series like this, and maybe this is going to become the first of an annual series, where I just look back on the shamefully bad moves that I have made as an investor, and so I'm not looking forward to this, at all. This does not seem fun to me, but I hope it will be fun for you. In fact, just a few points before we start.

Maybe that's point number one. I hope this makes you feel better. This should be fun for you. It is always fun watching, if you go to an NBA game, one of the stars throw an air ball at the free flow line. I mean, even if it's your team, it's kind of funny. It's good to be reminded that people who presume to be influential -- maybe even experts in industries -- make mistakes.

I've never presumed to be an expert. I hope you know from our name, The Motley Fool, I've always said I'm a Fool, so it starts with our name, here, at The Motley Fool. I hope this makes you feel better to know and to see just how badly I can pick stocks. And the thing about it is it's never really going to change. That's point number two here, which is as kind of somebody who takes a venture capital investor's mentality to the public markets. That's really how I've been investing as a rule breaker.

I know you know this. If you've been with me, here, for a year or more, you know that this is how we invest. It's in contrast to how many other people approach the stock market. We kind of think about it as we're going to place a number of bets. I don't think of it as Vegas betting. I just think of a number of different irons in the fire.

We know that some of them are going to fail. We know that some of them are going to succeed. And the good news is a few of them will succeed so greatly (especially if you allow time to pass and you keep diversifying and you keep adding), will benefit so greatly that they will wipe out all of your losers. And that's been true. If you're a Stock Advisor or Rule Breakers member, you can see that our few best picks have literally wiped out all the losses of every bad pick we've made. So point number one -- I hope this makes you feel better this week. And point number two -- I hope you come to recognize this. This is a natural for a rule breaker investor.

And then maybe a third point and then let's get started. I think it's a Foolish thing to do to admit failure and to reflect on that, as well. Again, it starts really with our name at The Motley Fool. We've always tried to make a point of explaining what we're doing wrong and letting you know now if I knew ahead of time that I was going to do something wrong, I would let you know that. If I knew ahead of time that I was going to make a bad stock pick, I would certainly not make it myself.

But I don't have that luxury. Neither do you as an investor. So we're always looking backward and seeing what worked and what didn't. And we're always hoping forward to think that we will find things that do work. And the good news is if you're doing a pretty good job of it, you should get it right at least half the time, and your winners, patiently held, will outweigh your losers.

But I think it's really Foolish to do what I think infrequently happens on Wall Street. I don't see a lot of people going on CNBC. Actually, since I don't really watch CNBC, I wouldn't anyway. But my assumption is you're not going to see a lot of people on CNBC, or other such networks, there to talk about how they screwed up or their losers.

In fact, one thing I'd love to see from not just CNBC, but all of financial journalism [is] I'd love to see more accountability. More scoring. We've certainly talked about this on Rule Breaker Investing. There's not a lot of scoring. It's amazing how many picks you see people make around the NFL Playoffs. You hear about people's picks all the time. No one's really going back and tracking the picks that often in football, but actually far less (they actually do it some in football) do they do it in the investment world.

So somebody goes on at Barron's. Gets quoted last December about where the Dow's going to be next fall. When do I ever see Barron's go back and say, "Now we had this person on in December. We quoted him or her, and this is what they said, and they were right or wrong." And even better would be "And this is their record. This is the percentage of the time that they're right or wrong." And we're only going to have (I would think, if you're Barron's or CNBC or The Motley Fool), you would only want to have people who are right more often than wrong. But the problem is we're often not aware, at all, of who is right and who is wrong, and especially it's easy to try to sweep all your wrongs under the carpet.

So we're not sweeping any wrongs under the carpet at The Motley Fool. Every one of our services -- Rule Breakers, Stock Advisor, and Supernova, the ones I work on -- you can see every good and bad thing we've ever done. If you join our service, you can look at our scorecard and see some of the picks that I'm about to talk about this week and see how ashamed I am of my failures.

By the way. Are your friends like mine? Whenever I have a friend who says, "Yes, I'm going to Las Vegas," or "I'm going to the casino," I almost never hear that they've lost. My friends -- and maybe it's just my friends -- I often hear about how they won. And it makes me think that everybody who must be winning all the time in Las Vegas couldn't be making any money at all, based on how my friends talk about their experiences going to the casino.

All right, so here's the format. We're going to go over the three biggest losers from Rule Breakers and Stock Advisor. That means we have six stocks to talk about. And for each one I have a supporting analyst who's contributed some notes and some perspective. I make all the calls -- so every one of these picks is mine -- but I get a lot of help, here, at The Motley Fool from talented teams of investors (five or six for each of my services) who do a lot of the background research and are helping me out, so I'll be sharing their names and crediting them with some of this work today. I'll be providing you two things that went wrong for this company, one thing to look at going forward, and then I'll just lay in a little bit of my own advice or perspective on the pick.

So let's start with the very worst pick that I have made in the last three years for Rule Breakers or Stock Advisor. It happens to be a rule breaker, and of these companies, it's probably the single best-known company we'll be talking about today.

So if you've ever heard of GoPro (GPRO 4.64%), and its drones, and its high-def cameras on the drones ... and you might even own a GoPro (maybe you ski with one), you now know the company that is my single worst pick in the last three years. I picked it in October of 2014. I picked it at $80 a share that dark day. The stock, today, is about $9.

So in less than two-and-a-half years, a very well-known American, rising consumer brand with a compelling product has literally dropped from $80 to $9. That is a drop of 89%. And for all of these, I adjust for the stock market's average, as well. The S&P 500, over that time, has gone up 24%. So the actual score I'm giving GoPro, here, is minus 113 ... 113 points behind the market averages since I picked GoPro in October, 2014.

Now some of you are no doubt snickering. You don't own GoPro. Some of you are crying with me, because you probably still, maybe, own some GoPro. It remains an active pick in Motley Fool Rule Breakers. So I checked in with my friend David Kretzmann, and David had these two reasons for it being our biggest loser.

First, hubris with its product line. So in 2015, GoPro released the Session camera. That was at a $400 price point. The company had six cameras in its product line with varying features and price points, and within several months, it had reduced the price of the Session to $300 and finally, $200. So a crowded product line, minimal national marketing spend, unrealistic price point with the Session camera all suggested that GoPro management maybe ... maybe Nick Woodman ... maybe had gotten out of touch with its customer base.

The CEO seen very prominently on reality television may be losing a little bit of touch with his customer. Sales and margins were suffering then as a result, actually big-time, David Kretzmann notes, as a result of that bloated inventory. The product just sitting out there not selling. Lower sales. Worse margins have forced the company, now, to lay off employees. It laid off 7% of its workforce in January 2016 after laying off 15% of that workforce in December and cutting costs. So number one, hubris with his product line.

And then number two, the second biggest reason GoPro has been my single biggest loser of the last three years is the company isn't any less dependent on camera sales. See, when we recommended GoPro in 2014, it was just a few months after its IPO. We were excited about the company's active social media following and the prospects of becoming an open source media company, of sorts. You know, using the best footage from its active base of uses. We were thinking that could become, would become its own network, almost like a television network, and that's how we thought about GoPro's prospects at the time.

But two years later, GoPro is still entirely dependent on selling cameras to generate revenue. Its media efforts never took off. That segment actually just got shut down in December as part of a cost-cutting initiative. The company's attempt to branch out into new hardware with the Karma drone, which came out this holiday season, has also fallen flat. The product launch, by the way, was delayed numerous times and once the drone was available for sale in October, it was only two weeks before a recall had to be announced. Yeah, that's OUCH! The drone will relaunch sometime in 2017. So those are the two biggest reasons GoPro has been such a horrible loser for me.

Now one thing to look at going forward -- trying to stay positive or trying to stay alert for those who own the stock -- GoPro's new line of HERO 5 cameras released this quarter to positive reviews, and early reports from Black Friday suggested that the company would fare better this holiday season. The company's also invested a lot into improving its editing software and making it a seamless experience for people to capture, edit, and share footage among different devices and platforms. GoPro is refocusing on its core business -- really awesome cameras, which they really, for the most part, have been -- which management expects to return the business to growth and profitability in 2017 and beyond. We shall see.

So there you go. Two reasons it's been a loser, one thing to look at going forward, and I'll just lay in a little perspective, now. This is a company that, in a lot of ways, conforms to what I look for as an investor. It has a very well-known brand. It was in the leadership position for its industry and it was founder-led, so in a lot of ways I thought GoPro would be a market beater for us, and it's been the exact opposite ... dramatically so. And I guess one other bit of perspective, then, is that I don't think we can ever go in knowing any single investment is going to be a winner, let alone a sure thing. Nothing is a sure thing.

But even going in with the assumption that you're going to win ... I mean, the reason we buy stock in the first place is we think that we will make money. We hope to beat the market. That's what we try to do at The Motley Fool. But I've done this long enough, now, that I know not to be overconfident with any single pick that I make and that really is why it's so important, especially for new members who joined Motley Fool services, to realize if you're starting with zero stocks, we'd love you to get from zero to 15 stocks as quickly as possible.

You know, Tesla cars, these days, go from zero to 60 in about two-and-a-half seconds. We'd like you to go from zero to 15 stocks. It's going to take more than two-and-a-half seconds, but we think that should be your goal. It's really important. That's what venture capitalists do. They don't bet it at all on one play. No, in fact, they have a whole portfolio of companies knowing that some of them are going to fail. I don't think in the end GoPro is going to fail, but it's been a seriously failed investment. It's going to take a lot for that company to get back even just to even. That would seem like a miracle right now from $9 a share, but we sit on our hands and we keep hoping.

OK, number two. My second biggest loser of the last three years. We go right back to the Rule Breakers service for this one, and it is Celldex Pharmaceuticals (CLDX 3.46%). The ticker symbol is CLDX.

It was one month before I was to make my ill-fated GoPro selection that I made this selection in Rule Breakers. September 2014, Celldex was at $14 a share. Today the stock is at $4 a share. It is down 72%, again, in less than two-and-a-half years. Against the market, which is what we're always marking against, it's down 91%, so minus 91 for this company that today is down to about a $400 million market cap.

This is obviously a biotech, and one can get very, very technical in a way that I don't think would be fun or friendly for Rule Breaker Investing when describing and discussing biotechs. However, staying at a very high level that I think is an easy way to talk about this company, basically Celldex's drug Rintega, which was treating brain cancer, had a failure, a late-stage failure. So the studies had been done. It was looking very promising maybe to get FDA approval, and a late-stage trial had the drug performing no better than the control.

So of course for all biotech drug studies, you have some people who think they're taking the drug but aren't actually, and they're the control, and what happened in this case is that people who were the control, who had brain cancer, lived longer than historical data would show that they would live. So when Rintega did extend the life of the people taking it, it wasn't more or less, really, then the control itself. So a very surprising outcome.

My friend, Karl Thiel, who's done the background research for this one for us said if Rintega was a conventional drug, someone (maybe Celldex or a company that licensed Celldex's product) might very well try again with a modified study designed for this drug. But because this was a cancer vaccine that was customized for each patient, it was a difficult and expensive product to begin with, so it will probably stay dead.

I said there were going to be two reasons about things that went wrong for each of these companies, but that really is it. And when you're a smaller company -- again, this is a sub $1 billion company today -- a single big drug failure can be devastating, which foreshadows the wisdom and perspective I was going to provide on this one.

But let me first just mention that there is something to look forward to, so our original recommendation of the stock was based on Rintega, but it didn't focus on that exclusively. It's very rare that I would pick a biotech for Rule Breakers or Stock Advisor that's just going to have one drug or one product -- a one-trick pony -- so the company has a much longer name for this drug, [and] a lot of people just call it Glemba. Glemba is a breast cancer drug, and so it is in trials today and, of course, the reason that Celldex is still worth $400 million (not zero dollars) is because there is hope for Glemba.

So that is, in short, what happened with Celldex, and I think the wisdom that I'm going to share with you is again that as investors, if we're going to invest in biotech at all, we probably should have a number of them, or maybe just one of them that you're going to have as your biotech stock in a diversified portfolio of let's say, 15 to 25 stocks, where the vast majority won't be biotech. I am, by no means, a biotechnologist myself. I have picked any number of medical and biotech stocks in Stock Advisor and Rule Breakers over the course of their respective histories. I win some and I lose some.

But just as we, as investors, need to stay diversified, I do like to find companies, themselves (the biotechs) that do have diversification. The problem for Celldex is it's a small-cap biotech, so even though it has a few different drugs, it's nothing like a company like Biogen or Amgen, that has multiple, multi-billion dollar drugs and possibilities.

So I guess you have to know who you are, and for a lot of people, Celldex is not an appropriate stock for them at all. But in the Rule Breakers service, we have some pretty serious investors and people who know this stuff, and are willing to lose sometimes like this in order to have a winner like Exelixis, which in 2016 was one of our very best rule breakers. It was up 300% in 2016 alone. A company we've held for 10 years now. This comes with the territory.

All right, going on to number three and four, we're going to accelerate our pace a little bit with the help of this particular stock, because ... yup, I'm sorry to say a single stock is responsible for being my third and fourth worst picks of 2014 to 2016.

That's right. If you are a Stock Advisor member, I hope you didn't (I did) buy FireEye (MNDT 0.27%), my recommendation from the cybersecurity industry. I first recommended it in February 2015. The stock was at $46. Today it is at $13, so it's down 72% [and] 84% against the market. Four months later [in] June 2015, the stock having risen from $46 to $54.

Everything looking and feeling good to me. Cybersecurity in the headlines. An industry that I think that's going to be around forever. Let's get ourselves invested in it. Yup, four months later I decided I'm going to rerecommend FireEye at $54. And today, again, I mentioned it is at $13, so that recommendation is down 76%, 87 percentage points against the market.

You know, these are really big negative numbers, by the way. We have a lot of people who join our services and if the first stock they buy ... I always hope it's a winner, of course [and] we do our best, but if the first stock they buy drops, sometimes even just maybe a 10% drop (especially for people who are brand new to the stock market), this is their own hard-earned cash. They've decided finally to get invested. They could have spent it on a vacation, or accelerate the payment of their mortgage, or extra holiday gifts, but instead they decide to invest it in a stock.

If that stock drops -- for a lot of people just a 10% drop -- we get some devastated notes or contributions to our discussion boards about "it's down 10%. What do I do? Should I sell? I'm worried." And I understand that. I can get in touch with my own first investment when I was 18 years old 32 years ago. We all have that first investment. We all have apprehension. But the numbers I'm trotting out this week are remarkable. Down again. GoPro 89%. Here FireEye down 72% and 76%.

So I hope you're getting it. We're taking risk, and we're looking at companies that are breaking the rules. They're disruptive. When you are FireEye, you are taking a disruptive approach to cybersecurity, itself an emergent industry with lots of players. So we actively, like venture capitalists, are going to take these risks, and that's why I'm both, in a weird way proud, but mostly just ashamed to share with you these horrifically bad minus figures from my own services. So let's talk about FireEye.

Now the background research, here, is done by my friend Sara Hov. Sara helps cover FireEye for Motley Fool Stock Advisor. I asked Sara what went wrong here. She said really two things, and both of these, by the way, are industry-wide, so the whole industry has sold off, here, over the last year and a half. FireEye more so than most, as a smaller company and a little bit more of a volatile company.

Anyway, number one Sara said, "Do you remember that spate of high-visibility cyberattacks on huge companies back in 2013?" You probably remember the headlines. I bet Target and eBay don't want you to remember, but Target, eBay, and others ... there was a lot of attention paid to hacking in the media.

And then that kind of died down. You might argue it's kind of awakened recently. There are lots of debates about any election hacking that might have happened. There certainly is no debate about Yahoo! disclosing a massive data breach. If you had a Yahoo! email address, you were exposed.

So recently, then, it's back in the news but for the most side, it kind of went dark, there, for a year and a half or so. Sort of an out-of-sight situation, so cybersecurity solution sales were dropping, because the people who make the buying decisions at every company (including ours) ... every company, these days, if you have data, if you have a website, you probably need to be thinking about security. But it's kind of a little bit out of sight, out of mind when it's not right at the forefront in the headlines, so not just for FireEye, but for the industry.

Then second, as a consequence Sara says, FireEye's sales also slowed. More of its customers started to use cloud services like, well, Amazon Web Services, just to expand their databases there, which means they don't need to buy their own protection. So the move to the cloud has undercut FireEye saying "Hey, we'll work directly with you," when people are outsourcing to Amazon.

So, yeah. Previously when companies owned and operated their own hardware, any expansion of their infrastructure often meant they expanded their relationship with FireEye or other providers, but that's not the case using AWS (Amazon Web Services). So product revenue fell 27% in the third quarter -- the most recent one reported -- although it is worth noting overall revenue for the company (because it's not just products, it's also consultation and services), was up 13%, but that's a far cry from the triple-digit earnings growth numbers of previous years.

And so one thing to watch, as we look at FireEye going forward. The company continues to sign new customers and expand offerings with its current customers. As mentioned, annual revenue is growing. In fact, it's expected to grow more than 20% annually through 2020, so that's right. Looking ahead the next three years, this company a down-and-outer right now in the stock market, but projections are for 20% annualized sales growth over the next three years.

It's also launching mass-market versions of its core product, which is called MVX. It's geared toward smaller businesses. Sara writes: "Cloud MVX and MVX Smart Grid simplify and expand the protection of the pioneering FireEye MVX engine, but at a lower cost." So an innovation that's going to give a broader set of organizations access to FireEye's detection intelligence. And it's worth knowing, in closing, that FireEye's proven it can land whales. It had 47 customers spend more than a $1 million with it in the third quarter; so if the company can increase its sales to smaller entities, as well, the benefit could be significant."

My little bit of perspective about this. Well, since this is my worst picks number three and number four, I'll provide two different lessons. The first one -- the number three lesson -- is that sometimes when companies have very strong recent growth rates, if those ratchet down, even though the company is still growing, you can see a dramatic decline in stock, and that's what's happened with FireEye. So the industry has dropped. FireEye has dropped. Sales slowed down. And it's not even that they're not growing. It's actually that they are growing, but that their rate of growth has dramatically slowed.

There are a lot of algorithms trading stocks these days that are just looking at compression of multiples. So if a company previously was growing at 49% a year and it's only going to grow 29% a year, all of a sudden that can take a price-earnings ratio that a computer's willing to pay for that stock down by two-thirds, sometimes. So this is kind of what's happened with FireEye and that's what those of us (me included) have suffered from as investors in FireEye.

So I continue to look forward, believing both in this industry, certainly, and in this company. This is by no means the only company. In fact, we have a number of these companies in Stock Advisor and Rule Breakers, so it's not just a single bet. It's not even the lead husky in this particular industry, but it is a stock that we continue to hold out hope for. That's perspective on loser number three.

Perspective on loser number four is just that I chose to reinvest, to rerecommend this stock as it rose. Now, this is a tactic that I've used consistently and will continue to use consistently going forward. When I have extra money, and I want to add to an existing position, almost every time I'm going to add to a stock that is a winning stock for me, not a losing stock for me.

I say almost every time. The rare times that I would add to a loser are when I see extreme strength in the balance sheet of that company. So if that company has millions or billions in cash and no debt, and it's down, I see that as maybe an Unsinkable Molly Brown situation in which the company, even if it's hitting a bad patch, has so much cash to evolve and change its business, as needed, that I start to think we were smart to buy in at a lower price.

But the vast majority of the time, especially when we talk about a lot of the rule breakers that we're covering this week, and really that we've covered for a couple of years on this podcast, we're talking about companies that feed off of success. Success begets more success. Think about Netflix. Think about Amazon. That these companies continue to benefit. So when they're down-and-outers, like Celldex Pharmaceuticals, I tend not to want to add to them and you're not going to see me re-recommend Celldex.

But what happened with FireEye is I liked it, I recommended it, and it rose that summer, and I thought, "We've got a good thing. We're going to add some more of it." And then what happened over the last year and a half has been pretty devastating. Both positions sunk.

So I guess one lesson to remember -- and I'm going to close this week with a reminder to this -- is don't try to learn too well all of your lessons from your failures. In fact, often the things that you fail with you can succeed with just as well. I mentioned earlier I don't avoid biotech just because of Celldex blowing up. Exelixis is out there, too, and there are a number of those kinds of examples.

In fact, let me mention one other example directly analogous to FireEye. In 2016, another recommendation of mine which has done very well [is] Shopify, which I recommended in the spring of 2016. That position has more than doubled, which I usually don't expect from any stock over a single year. So Shopify is up over 100% and a few months later I had an opportunity to rerecommend something and I decided to pick Shopify, and that position, itself, is up more than 60%. So what doesn't work for you in one situation doesn't mean you should stop doing that. I think you have to try to see the whole waterfront.

All right. Biggest loser number five. The only good news for these is they get slightly better, each one. We're getting to less losses. Fewer dollars thrown away. But it's still really ugly and it won't get really any prettier today. So worst pick number five is Restoration Hardware (RH 4.53%). This is a stock I picked in March 2015 for Motley Fool Stock Advisor. That day it was trading at $94 a share. Recently, as I tape this podcast, Restoration Hardware has dropped from $94 to $29. That is a drop of 70% or 81 percentage points behind the S&P 500 over that same period of time, coming up on just about two years.

I think a lot of us probably know Restoration Hardware. It is a retailer, after all. Furnishings. The company is famous for its sourcebooks, so rather than really take an e-commerce approach, it continues to send huge catalogues (like really thick, big catalogues), very attractive catalogues in the mail to customers to generate sales.

It's also -- and this is a remarkable thing to me -- made a point of finding locations in cities that are historic buildings. Maybe a little dilapidated. Restoration Hardware moves in and maybe on seven or eight floors in the Grand Old City Hall (I'm making this up) in Kansas City (that's not actually true), but that's kind of the strategy. They renovate it, and then they put all their furnishings out, and if you're in a city like Atlanta where they do this, you know what I'm talking about. Big, beautiful retail spaces, although sometimes maybe not as many people wandering around as you'd like to see as a shareholder.

So I asked my friend Andrew Fredrickson, who helps me cover this company that I picked a few years ago in Motley Fool Stock Advisor. I said, "Andrew, what went wrong?" He said, "Well, first of all, the launch of Restoration Hardware Modern (RH Modern), did not go well." So this is a line of modern furniture that was introduced in 2015.

This kind of reminds me, a little bit, about Celldex Pharmaceuticals ... of its drug performing OK, but the control did surprisingly well, because RH Modern didn't fail. RH Modern was a smash hit. In fact, the company, its suppliers, weren't even ready for that, causing huge delays [and] out-of-stock issues. And so the company spent most of 2016 catching up on that, and in order to compensate its high-spending customers to keep good will, RH basically had a number of customer-accommodation expenses (basically price reductions) for those waiting months to receive their orders which dramatically hurt the gross margin of the company.

So gross margin, again, sort of the top line. You take out the cost of goods sold. The top line, of course, always revenue. And then when you take out the cost of goods sold (basically the cost of that revenue), you have the gross profit. And as a percentage of sales (this is a little bit of Financial Statements 101, here, right in the middle of Rule Breaker Investing), that's the gross margin. And the gross margin for this company fell four percentage points (pretty dramatic) from 37% to 33% in the last 12 months.

And together with that was slowing revenue growth, and that's reason number two. So on top of those RH Modern issues, the company basically did two things really interesting. The first is its sourcebooks for 2016 were delayed. So if you liked those, you wanted to see them in the mail, you're used to them coming in the spring, they actually held off until the fall of this year. All of the mess with RH Modern a factor there. So because those are major sales vehicles, if you wait six months to send them out from [the] regular time you would, you can imagine how that would slow sales. That did.

And then the company also decided to shift to a membership model, so if you know Costco and how it does membership, Restoration Hardware was trying to mimic that a little bit. For $100 a year, members would receive 25% discounts on all items. Free interior design services. Other customer service benefits. So right away -- and by the way, there are over 260,000 people who are paying this hundred dollars -- the company gets an influx of cash. A hundred bucks from all of those people. It kind of decreases the urgency of gaining sales, but it slowed down the overall model.

Management says it is seeing higher average orders from people who are members, but it's going to take time, really, to see if this radical shift to a membership model, right in the middle of a difficult time, is going to prove more effective than their previous sales model. I like this -- and this is foreshadowing what I was going to say about Restoration Hardware -- membership model. Costco has been tremendously successful with that. But all those things happening have really combined to sink the share prices I talked about.

Now one thing to look forward to for Restoration Hardware -- well, when I first recommended the stock it was admittedly very expensive. It was trading at over 50x earnings and it was just posting its fifth straight year of 20% or higher revenue growth, so there were a lot of growth expectations built into the shares where they were trading, and as those stumbled, as those slowed and dropped, the stock, itself, got crushed.

So one thing to look at going forward is it is now priced much lower, and that would give you hope, if you're a shareholder in Restoration Hardware because in contrast to what I recommended the stock at just less than two years ago, you're now, today, getting a stock that's still a substantial business much cheaper.

And one side bit of perspective from me. I'm going to issue a slight ding to the CEO, Gary Friedman, on this particular count. Friedman is the genius behind the growth of Restoration Hardware, but Friedman is somebody who tends to put himself front and center in corporate communications, and sometimes it comes across as sort of a self-styled "I'm the Elon Musk of my industry," and I think there was a little hubris in play with this company and its approach in the last couple of years. No doubt when your stock price drops 70%, you feel a little bit less hubris, so I'm hoping we have a gentler, humbler, Restoration Hardware building forward, here, from 2017.

And now ... and I feel like this has been a longer podcast this week, and I guess all I can say in my defense is at least I'm spending extra time explaining how bad I am. Number six is Juno Therapeutics (JUNO). It's a Motley Fool Rule Breakers recommendation. I made it in June 2015. Juno Therapeutics is down from $51 a share, where I recommended it, to $21 today. That's a 60% loss or minus 71 percentage points against the S&P 500.

Now somewhat like Celldex Pharmaceuticals (I guess you'd probably expect this), Juno had trials go against it. Another very unfortunate circumstance. In this case, JCAR015, its lymphocytic leukemia-killing drug, we hoped trying to end leukemia, had too high a chance of killing the patients using the drug. It was creating brain swelling in a few of the patients who did. [They], of course, were in real trouble anyway, but they died prematurely as a consequence of using this drug. It got halted right away. They pulled out a couple of the aspects of JCAR015, reintroduced it in a second study, and unfortunately a couple of more patients died prematurely at which point, full stop. JCAR015 has been suspended and awaits further determination.

So it's a very promising drug. This is one of those immunotherapy companies, so I'm sure you've probably heard some of the headlines. President Jimmy Carter and others benefiting from having one's cells taken out of one's body, genetically engineered, and then reintroduced to fight, using your own cells, the cancer in your body. That's the miracle and the promise of immunotherapy and Juno is playing right in there.

This is a company that raised hundreds of millions of dollars of venture capital money from traditional VCs and from people like Jeff Bezos, as well. So you're in good company if you're a Juno Therapeutics shareholder and yet you're feeling a lot of pain, as I mention as the consequence of a failed drug study.

Now this is a company that has a number of other immunotherapy solutions in play. There's JCAR017, which is targeted at non-Hodgkin's lymphoma. So it's still a very substantial company. Even after losing 60%, it still has a market cap of $2 billion. So again, we will continue to maintain our active recommendation of Juno, but it has been, like every other stock featured this week, a serious dog. It has hurt those of us who've recommended it and/or invested in it.

And I think I'm going to leave it right there, except I'll provide two final thoughts, here, at close. The first one I foreshadowed, earlier. I talked about how we're all going to have winners and losers. In fact, I challenge you (this is really, I hope Foolish ... possibly foolish of me), to have one good loser, here, in the stock market in 2017. I've always thought it's ice skating -- a lot of learning to invest. You have to be willing to fall. After all, for those of us in the Northern Hemisphere, anyway, it is ice skating season right now. So wreck into the wall, sometime. I would say if you haven't had a loser, you haven't learned. And if you haven't had a loser, you might not have stretched yourself, or taken enough risk. If you haven't had a really good loser, I wonder whether you've broken your own or anyone else's rules. So I challenge you, in I hope a Foolish way, to have a really good loser. Maybe you already have one of these. I have a lot of these kinds of stocks.

But my foreshadowed point earlier was I try not to learn too well the lessons from my losers. In fact, I much prefer to learn from what is working. So the other 51 weeks of the year, here on the Rule Breaker Investing podcast, I tend to talk about that, because I think we do much better on studying success than dwelling too much on failings, especially when they're failings that are often just the other side of the coin from how we would normally play the game.

So when I talked earlier about how I added to my winner FireEye and then both positions dramatically lost, I mentioned that I added to my winner Shopify and both of those positions are up substantially. I'm going to continue doing that. I'm not going to learn from the FireEye lesson never to add to a winner. I think that would be a huge mistake.

And then my final, final thought is (and this is simple math, and it comforts me in times like this) when a stock loses a lot, a lot of its value, so long as you haven't added to it on the way down (and I counselled consistently against that, both in the services that I run and certainly in this podcast), then it's really not that big a problem anymore. After all, if you have a company like Restoration Hardware that has lost 70% of its value, it's now a very small holding for you. It really doesn't matter too much. Versus the companies that you continue to hold that are winners. That will not only wipe out those losers, but over the course of time occupy larger and larger percentages of your portfolio.

So one, perhaps final, happy thought is when you have a really bad loser, it starts to not really even matter that much anymore. Thanks a lot for joining me this week celebrating losing. Fool on!

As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at

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Stocks Mentioned

Celldex Therapeutics, Inc. Stock Quote
Celldex Therapeutics, Inc.
$27.52 (3.46%) $0.92
RH Stock Quote
$291.03 (4.53%) $12.62
Mandiant, Inc. Stock Quote
Mandiant, Inc.
$22.12 (0.27%) $0.06
GoPro, Inc. Stock Quote
GoPro, Inc.
$6.99 (4.64%) $0.31
Juno Therapeutics, Inc. Stock Quote
Juno Therapeutics, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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