Buying winning stocks is a path to beating the market, but it's also important to avoid losing stocks. Buying shares of a company only to see them permanently lose 70%, 80%, or even 90% of their value is tough to bear, and it won't do your portfolio any favors.
Sometimes good stocks transform into bad stocks, catching investors off guard. But in other cases, it's clear as day that a stock should be avoided. Here's why investors should steer clear of ridesharing company Lyft (LYFT -0.97%), department store J.C. Penney (JCPN.Q), and meal-kit provider Blue Apron (APRN 6.20%).
With Lyft's IPO last month, investing in a U.S. ridesharing company is now an option for investors. Ridesharing is a fast-growing industry for sure -- Lyft's revenue more than doubled last year. That epic growth is the reason Lyft is valued at roughly $20 billion, or nearly 10 times its annual revenue.
But what investors are ultimately buying is empty revenue. Lyft is not even in the ballpark of being profitable, losing close to $1 billion in 2018. It drives growth and battles rival Uber by doling out rider and driver incentives. The company has successfully gained market share over the past few years, but at great cost.
Is there any hope Lyft will eventually produce meaningful profits? I doubt it. The company provides a commodity service with minimal switching costs for riders and drivers, has little pricing power, doesn't benefit from a broad network effect, competes with a deep-pocketed rival, and is banking on autonomous cars to somehow provide it a with competitive advantage in the future. Good luck with all that.
And don't forget about the regulatory risk associated with Lyft's dependence on contract workers. The company's entire business model could be derailed if it has to start classifying drivers as employees.
Lyft is the most exciting IPO so far this year, and some investors will be drawn to its growth prospects. But it's just not a good business.
It can be tempting to bet on the underdog. Sometimes, companies in dire straits can turn themselves around and make miraculous comebacks that are highly lucrative for investors.
But comebacks are very hard to pull off in the retail business. For most retailers, their brand is their only meaningful edge. Once the brand is dead in the eyes of consumers, there's no coming back.
J.C. Penney has been trying to turn itself around ever since its ill-fated attempt to transform itself back in 2012. Sales plunged as the department store lost previously loyal customers, and they never recovered. The company tried various things, like selling major appliances, but nothing has really worked. That appliance effort has now been abandoned.
J.C. Penney has some new management, and the company is reducing its bloated inventory and selling off some assets. That's helping the cash flow situation, but it's ultimately a band-aid on a deep wound. Comparable sales dropped 3.1% in 2018, and the company posted a $255 million net loss on $11.7 billion of revenue. Free cash flow was positive, but only because of asset sales. J.C. Penney is sitting on around $4 billion of debt, and it's paying more than $300 million annually in interest.
How does J.C. Penney come back from this? I have no idea. It's facing better-run department stores, online retailers, specialty apparel sellers, and discount stores like Target that have been rolling out a bunch of private-label clothing lines, all against the backdrop of an upheaval in the retail industry that's already claimed iconic retailers like Sears and Toys R Us.
With J.C. Penney doing so poorly now, the next recession could be the company's death knell. Absolutely everything must go right for J.C. Penney to survive. There's no real reason to believe the odds of that are much higher than zero.
What if, instead of buying inexpensive groceries at the store, you paid restaurant prices to have ingredients mailed to you? That's Blue Apron in a nutshell. The meal-kit company has been hemorrhaging both customers and cash, because its business model makes little sense.
Blue Apron had 557,000 customers at the end of 2018, down from over 1 million customers soon after its IPO in 2017. Those customer losses were despite heavy marketing spending. The company hasn't had much trouble getting people to try its service -- discounts on the first few orders are standard fare in the meal-kit industry. But getting people to stick with it has been a big problem.
Blue Apron got a new CEO earlier this month, and it reiterated its guidance to be profitable on an adjusted EBITDA basis in 2019. Let me translate that guidance: Blue Apron is going to lose money on every basis that means anything, but if you back out a bunch of real costs of doing business, the company will be able to report a positive number.
Short of a wholesale change in business model, there doesn't seem to be much hope for Blue Apron. Maybe the new CEO will come up with a bold turnaround plan, but the odds are heavily stacked against the company.