Why Huge Loser Impinj Makes a Poor Bounce-Back Candidate

Check out the latest Impinj 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 considers Impinj (PI 2.03%), a niche tech player that offers a platform for RFID chips. The company has shed 58% of its value since he recommended it in December 2016, and if you liked it at the original price, you might think it's a bargain now. He explains why that's not the case.

A full transcript follows the video.

This video was recorded on Jan. 16, 2019.

David Gardner: My biggest loser No. 4. The company name is Impinj, ticker PI. I first picked Impinj for Motley Fool Rule Breakers on December 21st, of 2016, a few days before Christmas. Not a very good stock to put under the tree that particular year because at the time, it was at $38.33. Today, it's down at $16 a share. It's down 58%.

What is a reflection that I have about Impinj? This is a company that has developed a platform for RFID technology, those RFID chips. You see those tags put on everything from packages to devices to keep track of inventory management, tracking where things are going. Maybe at your corporation, you have these little tags placed underneath the chairs so you can figure out where all the chairs are in the conference rooms. There are multitudinous ways of using this technology. This company has built out a platform to help you as an IT manager manage all of your assets. But this company, now having lost 58% of its value in the last two-plus years, is down to just a market cap of only about $340 million.

Lesson No. 4 is: When you have a company get crushed down to be that small, I would typically suggest that you refuse to add to those positions. Ignore crushed micro-caps. Not only is this stock pick of mine in Motley Fool Rule Breakers, but I also personally bought it for one of my children's accounts. I've taken this on the chin just as much as anybody else, and I'm not looking to add to that position.

The reason I'm saying that and highlighting this is because a lot of people, when they see a stock go from $38 down to $16, they start thinking, "Well, I liked it at $38. $16, heck, if it just doubles back to $32, it's still below my costs, but it would be a double from here." Sometimes people get excited when companies lose this much value. They start thinking -- this isn't a penny stock, but this is really prevalent in penny stock thinking -- they start thinking, "Yeah, it wouldn't take a lot to double from here. Maybe I should buy some more." While that can be true, and we have had some all-star performers bounce back -- in fact, two years ago, when I did "David's Biggest Losers: Volume 2," I highlighted RH, also known as Restoration Hardware. The stock had dropped from $93 down to $30, which was a huge loser two years ago. Within the following year, it bounced back from $30 to $95. Today, I'm happy to say it's at $127.50, up four times from when I did "David's Biggest Losers: Volume 2" two years ago this month. So, it is possible that some of these companies, especially ones that are more substantial companies, with maybe a brand that people recognize, they probably have a better bounce-back opportunity than some of the others. I'll give another quick example. A year ago on this podcast, "David's Biggest Losers: Volume 3," Under Armour was on the list. Under Armour had dropped from $39 down to $14. Well, over the last year, it's up 29% from where it was a year ago.

Some of these bounce back. In my experience, it's probably the bigger, more branded companies that do that, not the Impinjs of the world. Now, I still hold my Impinj shares. It's still a part of our active Rule Breakers service. I sure hope it comes back. But I would typically, lesson No. 4, ignore these crushed companies that get down to Micro-Capville.

I do want to point out one other quick thing about Impinj before we go to No. 5. That is that this company has had decelerating sales growth. When we first picked it back in middle of 2016, sales were growing about 50% year over year. From the previous year's quarter to that quarter, it was up 50%. Then, the following quarter, the end of 2016, that dropped to 49% year over year. The following quarter throughout 2017, it went 47%. The next one was 31% growth. The next one was 5% growth. And then, six quarters or so after I'd first recommended it, sales actually decelerated to the negative, down 20% from that quarter a year ago. So, especially when you see sales growth decelerating and going negative for smaller-cap companies, that's a really bad sign. Of course, not something I was expecting at all. Very disappointing. Makes me wonder about the RFID technology, period. We probably need to reassess this. Anyway, that's where Impinj is, my fourth-biggest loser with a couple of thoughts you can take away about Impinj.

To summarize again, ignore these crushed companies once they get to be so small. Two, plummeting sales, an especially bad sign, and an especially bad sign for small companies.