The Lesson of iQiyi's Dramatic Stock Price Drop Isn't What You'd Expect

Check out the latest iQiyi earnings call transcript.

If you're looking for a strategy that will produce market-beating stock returns, you could do a lot worse than to follow the guidance of Motley Fool co-founder David Gardner. His Rule Breakers and Stock Advisor portfolios have both handily outperformed their benchmarks over the long term -- and usually the medium term, too. But here's the thing: If you're investing in the sorts of stocks that have the potential to be big winners, you are absolutely guaranteed to pick up some clunkers, too.

And that's OK. In fact, you can buy more losers than winners, and still achieve returns that are well above average, because a few big multibaggers can make up for a whole lot of underperformers. In short, The Motley Fool is relatively comfortable with the concept of owning bad investments. But we're also serious about owning up to those painful misses. Hence this week's Rule Breaker Investing podcast, which is Gardner's annual review of his biggest losers of 2016, 2017, and 2018. In this segment, he focuses on his unfortunate pick of Chinese internet giant iQiyi (IQ 1.71%), which lost 59% of its value since he recommended it in June 2018. As bad as the U.S. market was last year, China's dropped by a far more significant percentage. Gardner considers the rapid rise, and equally rapid decline, of the company's share price, the strategy he was following when he rerecommended it, and why he's not going to quit using that strategy.

A full transcript follows the video.

This video was recorded on Jan. 16, 2019.

David Gardner: My biggest loser of the last three years No. 3. This one, I have to say, the ticker symbol is fairly ironic, because the ticker symbol is IQ. You'd think, if I had a higher IQ, I never would have picked IQ when I did, but thereby hangs a tale. Let's talk a little bit about iQiyi, which is sometimes called the "Netflix of China," probably a phrase that we used in our buy report that we put out June of this past year. That's right, my biggest loser No. 3 I only picked about seven months ago. The stock was at $40.51. IQ now has touched down from $40.51 down to $16.75, and that's down 59% since June 14th just this past year.

Of all six of these companies, iQiyi, IQ, is the largest still standing. This company still has a market cap of $12 billion. And in many ways, it's a successful and impressive company. It's had a poor stock market run in the last seven months. But then again, so has all of China. Chinese markets, I think, were down around 25% for the year of 2018. We had a little bit of a disappointing year in the U.S., we were down single digits. China lost a quarter of its value for its stock market in 2018. So, it's not surprising that more volatile, higher-priced kinds of companies, with higher multiples like iQiyi, would get especially badly hurt, and indeed it had.

So, what's the lesson that I have for you for No. 3 here? I'm going to say this: adding to winners works more often than you think. I said thereby hangs a tale. Let me now briefly tell the tale I'm referring to. When I picked iQiyi in June of 2018, I'd actually picked it two months before that. The June 2018 was a rerecommendation of iQiyi. I first picked it in April of last year at $18. It had risen from $18 to $40 in just two months. It's there, from that position at $40.51 down to $16.75 that we find ourselves today. But the truth is, from the very first position, I picked it at $18, and today it's right around $17, so it's down, but not that badly. What I did, if you heard me right there, the stock more than doubled in just two months and I rerecommended it again. And while now, I look back with some regret, I'm here to say that that strategy is something that I regularly do, and I'm not dissuaded by this example from doing it again.

In fact, let me just look at Motley Fool Stock Advisor over the last three years right now. I'm going to give you four companies. Texas Roadhouse, Illumina, Match Group, and Okta. All four of those companies, Texas Roadhouse, Illumina, Match Group and Okta, all four were rerecommended within the last three years. And each of those four respectively is up 95%, 99%, 193% -- thank you, Match Group -- and 68%. And those are all bigger winners, for the most part, than any of the losers that I'm telling you about today. So, the very strategy by which iQiyi appears as my third-biggest loser of the last three years, which in fact, it has been, from that June position, that very strategy has also led to many of my biggest winners. I haven't even talked about Shopify, which I'll mention a little bit later this podcast. Those are just four companies from Stock Advisor alone. So, lesson No. 3, ironic in the face of a dog stock pick, which is what iQiyi was now in retrospect in June of last year. Ironically, the lesson here is adding to winner works more often than you think. I don't think we should be dissuaded by a result like this to think we shouldn't do that. I'm going to keep doing it, even when it sometimes hurts.