Why Trivago Tops the List for His Worst Stock Pick in Years

Check out the latest Trivago 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 leads off with the absolute worst performer among those buys -- online travel agency Trivago (TRVG 0.40%) -- and talks about the lessons one can learn from its decline.

A full transcript follows the video.

This video was recorded on Jan. 16, 2019.

David Gardner: No. 1 is, appropriately enough, this single worst stock pick that I have made personally in the last three years. It was on June 28th, 2017. It was in The Motley Fool Rule Breakers service. The company is Trivago, that meta search engine for travel bookings, finding the best hotel. It's a global company. Trivago I picked it at $20.95 on that fateful day in June. I'm sorry to say that these days, as I tape this podcast on the afternoon of Tuesday, January 15th, Trivago has gone from $20.95 down to $6.22. Yep, that's down 70%.

What is a reflection or thought that I have about Trivago -- other than, I should mention, that a year ago, this one was also on the list. In fact, a year ago, Trivago was my fourth-biggest loser of the previous three years. So, yes, these recur sometimes from one year to the next when they do very poorly, and then don't bounce back, which has been the case for Trivago. So, what's one lesson we can take away? Well, Trivago is, these days, the market cap is about $2 billion. It remains a fairly substantial company. This is not one of those companies that's been so crushed that it's like a little tin can that's been flattened into a micro-cap of a stock. We'll be having one of those coming up shortly. No, this is still a fairly well-known, fairly substantial company.

But the problem that Trivago has faced is that a lot of its business was coming from two primary sources: paid count search listings and making money from the big players, the two largest travel portals were more than half of Trivago's business when we picked this stock, when I picked this stock a couple of years ago: Expedia, which is a part owner of Trivago, and Priceline. A natural vulnerability for a business like this -- again, since it's down 70%, you can imagine that this was over $5 billion as a company when I first picked this stock. Now, it's down to just $2.2 billion. But the company began to suffer from these two big dogs starting to say, "We're not actually going to pay you at the same rate because we're such a substantial volume player for you." Both Expedia and Priceline started to undercut themselves and pay lower and lower rates for search successes on Trivago, and that really hurt the company and continues to have hurt the company.

Some of my lessons are about the stocks themselves and about how we invest in those stocks, but this is actually about the business and a business consideration. Lesson No. 1: Recognize the vulnerabilities of your companies. It is something that we recognized. This wasn't a surprise to us, that Trivago was very dependent on these two players. At one earlier stage of our corporate history at The Motley Fool, we were very dependent on just a few big discount brokers, that back when The Motley Fool was free and Fool.com was a free site, ad-supported, it really, really hurt. I remember back in the day, when a few of those discount brokers that were sending lots of customers too said, in the horrible year of 2001, as the Nasdaq lost over 60% of its value, they said, "We're not actually going to advertise on your site because nobody's clicking any ads and we don't have money to advertise on your site." That hurt us a lot. We were a company that was highly dependent on a few sources of revenue. And that's kind of Trivago, even though it's a much bigger company than The Motley Fool.

It's just something to be thinking about and conscious of when you're investing in stocks. It isn't to say it never works. We picked Trivago knowing that. And yet, in this case, those companies began to lower their rates, and really hurt this company. So, that's a lesson to learn from this $2.2 billion company today.

By the way, I should mention, a year ago, it had dropped from $20.95, as I mentioned, in June of 2017, it had dropped to $7.31. One year later, it's now down to $6.22. The stock has actually sold off not dramatically, but another 15% over the last year. It's a reminder that we don't bottom-fish much at all at The Motley Fool. If you want to take a second lesson away from this one, you won't see me rerecommending Trivago anytime soon to Motley Fool Rule Breakers members because when a company is down and out like this, I need them to prove their way back into my confidence in them. That's how I handle companies like Trivago. And yes, often, they do just keep sputtering along. This stock is actually down from where it was a year ago.