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 reviews a company he picked in May 2016: Fitbit (NYSE:FIT). And while you probably know a lot of people who own one of its wearables, the company fell victim to a confluence of headwinds that cut its price in half. Gardner talks about these, and reflects on what it still has going for it as a business.
A full transcript follows the video.
This video was recorded on Jan. 16, 2019.
David Gardner: Biggest loser No. 5. Of all the companies on this list, I think this is probably the best-known. The company's market cap today is about $1.5 billion. I first picked it on May 25th, 2016, at $14.06. The stock is down to $6 today, from $14 to $6. The company is Fitbit. The ticker symbol is FIT. Yep, this stock did appear on my last year's list. Again, I keep these lists for the preceding three years, so if a company has a really bad first year, it'll come back for a couple of years on this annual losers podcast that I do. But a fourth year, it won't show up. It'll drop off the list because I'm only looking backwards three years. I will point out, when I presented Fitbit a year ago, it was down to $5.67. It's actually up to $6 now. It's up a little bit after a down year for the stock market.
What's a good lesson about Fitbit? I know a lot of people wear a Fitbit. They appreciate how it helps them track their steps; in some cases, perhaps their sleep, other aspects of their health. Being more attendant to health data is definitely one of the micro trends worth paying attention to. When I had Mark Penn on this podcast doing micro trends in my "Authors in August" series last August, we talked in part about self-data lovers, a micro trend. You and me keeping track of our steps and a lot of other things through our iPhone these days. Fitbit very much fits within that micro trend.
But I think the lesson here is that hardware is hard, especially when you're competing with Apple. So much of the world is moving toward becoming software. A lot of the devices that we used to carry around -- for example, like a watch or a GPS, or how about a camera? That's a much better example. My talented producer, Rick Engdahl, who's a wonderful photographer, quickly furnished me that idea. There are a lot of other examples of hardware that an iPhone these days has replaced. Frankly, Fitbit could be added to that list. Fitbit's not the only company operating in the space. It just happens to have been the leader before Apple when its Apple Watch showed up. Hardware can be a hard business.
I've always appreciated that Fitbit has a lot of data. I've always hoped that that would be a good reason to own the stock. If you've used a Fitbit, then there's a lot of data that Fitbit has. It can get you data insights about your own data. It can also aggregate populations of data and create lots of value, I had hoped. Turns out, I wasn't very right, at least so far, about Fitbit. But competing against Apple is a big reason I think that Fitbit has been such an underperformer.
I also want to point out two other quick points about this stock itself. The first is that this stock went down fast and hard. That can happen, especially with small-cap companies. In October of 2016, Fitbit was at $16 a share. It looked like it had been a good stock pick. We picked it in May. It had gone from $14 up to $16 just half a year later. And then, from October 2016, four months later, to January 2017, it went from $16 to $6. Ouch! It lost more than half its value in just four months. That's micro lesson No. 1 just about this stock: These small-caps can go down hard and fast.
Lesson No. 2: Sometimes, it takes them a long time to come back. Now, two years later, I just mentioned that in January 2017, it was at $6, guess where it is here in January 2019? That's right, I already said it, it's at $6. For two years now, in a very tight band, Fitbit has just kind of bounced around, $5, $6, $5, $6. It's been dead money in a very good two years for the stock market, albeit a very poor fourth quarter of 2018 and kind of a ho-hum year overall, 2018. But Fitbit just kind of has sat there and done very little. That excitement that you might have as a well-known company like Fitbit has a stock drop into the single digits, it hasn't been rewarded. That excitement has only consistently been disappointed by a company that's having a hard time pulling itself up out of the morass of underperformance.
Again, I hope for good things for Fitbit. Maybe it'll be one of those bounce-back companies we talk about a year or two from now. But that's not usually where I put my new money. I don't like to throw, as the old saw goes, good money after bad. So, there's a thought, a few thoughts, from Fitbit.
David Gardner owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.