Learning From Stock Market Losers

In this week's episode of Rule Breaker Investing, Motley Fool co-founder David Gardner is joined by analysts Rick Munarriz and Karl Thiel to break down some not-so-good stocks. Find out what went wrong for these companies, if there's light at the end of the tunnel, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on January 5, 2021.

David Gardner: What's the worst investment you've ever made? The worst? Did you lose 100%? I sure hope you didn't do worse than that. I mean, the only way to do worse than that is to borrow money that you didn't have and then lose all of that. Well, as many losers as I've had and as used to losing as I am, I've still never picked a stock for The Motley Fool that went down 100%, but I've come close. This time, every year, once a year, I talk about my worst stock picks, my biggest losers over the past three years. If winners win, losers lose and it's important to talk about both. So, come with me, won't you? To the dark side, the shadow side, the losing side. Let's explore and learn today on my annual David's Biggest Losers Volume Six. Only on this week's Rule Breaker Investing.

Welcome back to Rule Breaker Investing. Happy New Year! I sure hope I'm not the first one to wish you Happy New Year, but if I am, you're probably pretty locked down. Thanks for finding me. Thanks for finding me on the one podcast that I hate doing every year. Yeah, it's my biggest losers. Looking at the six worst stocks I've picked over the last three years. I was googling David's Biggest Losers. You can google the phrase, go ahead, "David's Biggest Losers". We ranked top across the entire internet for that phrase. In fact, shows from the last few years dominate Google for that phrase. We are smoking the television show Biggest Loser in this search engine optimization battle. You have to go down to the fifth search result after Googling "David's Biggest Losers" before you get to a link to the Biggest Losers television show Wiki located at the site Fandom where there's a page dedicated to David Lee, who appeared on the show's seventh season which was 2009, who started that season show with a body mass index, wow, of 53.3. The record will show it says he was sent home in week one, he was eliminated in week four. Which may have you thinking, "Hey Dave, actually, the competition for the phrase 'David's Biggest Losers' on the internet isn't really much of a competition,'" and I guess I'd have to agree with you. Yep, it looks like right now I own the phrase, I don't really want to, "David's Biggest Losers," and here we are.

This is volume six. Yeah, we've done this every year, the podcast has existed and this is volume six. Now I'm putting in mind one of my favorite Shakespeare quotes, which comes from the play the Motley Fool's name was pulled from, and that would be, ''As you like it.'' This one is from Act four, Scene one of As you like it, ''I had rather have a fool to make me merry than experience to make me sad.'' Well, we're going to be talking about some sad experiences this week, but I'll be joined by two of my favorite Fools to maybe add some merriment, make me feel better anyway. I'll be making you feel merry, won't I? Because isn't it kind of fun to watch a professional, let's say an NBA player just air-ball it 10 times in a row up the free throw line? I mean, it's fun to watch isn't it? Cars crash, NASCAR. Isn't that why people are watching? It's fun to watch people screw up. Bloopers. America's funniest home videos, that's what this show is all about. David's Biggest Losers, Volume Six.

Now, I'm cognizant that these are stocks that I've recommended and you may own them. A lot of people do. So, I don't want to make too much light of it because it's a bummer to lose. But the good news is that we continue to give out more winners that win bigger than our losers lose. It's funny. I don't actually dedicate any podcast, all 52 weeks of every year here to my biggest winners. I've never done that. But I do like to celebrate our biggest losers once a year. So, thank you for joining in. All right. Well, without further ado, let's go right at it. My six worst stock picks of the last three years, and I always like to start with the very worst. It's somewhat ironic because one of my very best friends at The Motley Fool is Rick Munarriz, my longtime friend and co-analyst here at The Motley Fool. Rick, welcome.

Rick Munarriz: Thank you. Thank you, David. I'm sorry to be here for this sad occasion, but I think we learn a lot from our losers. So, it's good that you're doing this and I'm honored to be talking about the bad, ugly stuff.

Gardner: Well, a year ago for David's Biggest Losers Volume Five, you did a wonderful job presenting. So I thought, I've got to have him back, and let me give him the three worst this year. So you've graciously accepted this mission. You've gone back and looked at each of these three companies, we'll do the worst one first in a sec. But let me mention, Rick has prepared for each of these two reasons why things have gone badly and one reason for hope. Some glimmers for each of these. So Rick, before we get started, could you briefly introduce yourself and maybe say one of your earliest memories of The Motley Fool on AOL Keyword 'Fool' back in the day.

Munarriz: Wow, OK. So I've been with the Motley Fool since 1995. Definitely back in the AOL Keyword Fool days, eventually as MFEdibles when I was brought into the fold in 1995. My original name was [email protected], then we all adopted MFEdibles and TMFEdibles, and now, of course, TMFBreakerRick, because who wouldn't want a Rule Breaker name in their handle. So yeah, but one of my earliest memories, again, I live in Florida, so I was one of the people that grew up as you guys slowly grew to form there in the DC area. But I mean, I remember going to Virginia at least once a year, every other year, and every time it seemed like the office had more and more people in the office, the office space had to get bigger, you had to move in. So, I watched this gradual growth that maybe you day-by-day, David, didn't notice, but I as an annual visitor came in and just sat, "Wow, so much has changed and improved and grown over the time."

Gardner: Well, you've done a wonderful job, you've brought so many great stocks to the attention of so many Rule Breaker members. Indeed Rick, since you are one of our most published authors every day at Fool.com, just covering what's happening on the market, I thought it was totally appropriate to invite you in to talk about these three companies. Now, two of them are in fact Motley Fool Rule Breaker picks, and one of them is a Motley Fool Stock Advisor pick. But let's stop beating around the bush and go right at it. So, my very worst stock pick in the last three years was picked three years ago this month. Because for David's Biggest Losers every year I just look back three years, this is the last time I'll have to talk about this one, because it will cycle out by 2022. But here we are, Rick, the date was January 24th, 2018, AnaptysBio (ANAB -2.08%), ticker symbol A-N-A-B, was trading at $116.91 a share that day as I presented it to Rule Breaker members, I'm really horrified to admit it's present trading price, Rick, as we record here on Tuesday afternoon, January 5th, AnaptysBio has gone from $116.91 to $24.34, that is a loss of 79.1%. That is my worst stock pick of the last three years. Rick, thing No. 1 that hasn't gone so well for ticker symbol ANAB.

Munarriz: Yes, of course, AnaptysBio, as you can tell by the name, is a biotech. When you're talking about biotech, you live and die by these clinical trials, especially for these early stage biotech companies. In this case, AnaptysBio, there was one day, November 8th, 2019 that will live in basically the infamy of its shareholders, when the stock took a 72% hit in a single day after, let me see if I get this drug right, because I'm not Karl Thiel, who should be pronouncing these, Etokimab. It almost sounds like a Pokemon, but it's basically, it was an experimental treatment for an antibody, and it was a treatment for eczema, and it was going to treat other things, but the treatment for eczema flopped in a critical Phase II study. On any given day when you look at the daily markets, winners or losers, you're going to see biotech's winners and biotech's losers, because that's how it is. You have a lot riding on these three phases of clinical trials, and there was a lot banking on basically this antibody to be basically helping patients with eczema and it did not pan out.

Gardner: You know, one of our better Rule Breakers stock picks is a company called Repligen. Repligen, ticker symbol RPGN, is often the company that companies like AnaptysBio use their tools in order to prepare for these FDA trials. My one hot tip, I can give you here, Rick, is that so many of those crazy drug names end with the three letters MAB, which stands for monoclonal antibody, and so that's exactly what it [...] or whatever you just tried to say to us, what it was. It's nice to know that Repligen was probably profiting even as AnaptysBio didn't succeed. You're right, a single day has sunk this stock for the last three years. You mentioned it was down 72% that day. Rick, overall down 79% now, three years later. What is thing No. 2 that hasn't gone so well for AnaptysBio?

Munarriz: Yeah. Again, this wasn't the only thing. I know you hear 72%, you're talking about 79% and you think, well, yeah, that's most -- but no, this actually only took the stuff from $35 to $10, because it has bounced back somewhat. This stock was sinking even before that dreadful day. A lot of it was because there was mounting evidence of Etokimab, and now, I'm just going to say [...] from now on with your hot tip today, but thank you. It wasn't going to be a game-changer, it had flopped earlier. It was being treated as a peanut allergy treatment and that didn't work. Also, a similar antibody candidate from Regeneron, a company that's had more success as a biotech on many other fronts, also didn't live up to the hype. It was working on its own IL-33 antibody for asthma patients. While that test produced positive signals two summers ago, it was not enough or Regeneron's existing drugs. People just said, hey, maybe this isn't like the holy grail of cures, and sure enough, we've had Etokimab basically strike out at three different times on three different treatments for them. This is a case of basically sell on the rumor, sell more on the news.

Gardner: I think it's also a case, Rick, too of these are really big diseases like eczema, asthma, these would've been huge markets, so I think that was part of the disappointment. If even one of those had worked, it would've been so great for AnaptysBio. We're not saying this story is over, by the way, we're going to get to a glimmer of hope, I hope in a minute. But it's worth pointing out that like Icarus, who flew too high, he flew too near the sun and his wings melted, from my memories of ancient Greek myths, this is kind of a company that soared high because of expectations that it could hit these big markets and when it didn't hit any of them, wow, has it ever gotten whack. We started a new tradition last year, I really liked it. I think we are going to do it again this year. My talented producer Rick Engdahl is on the hook for this. I think we should have a representative sound effect for each of these really bad picks, thematically on target where appropriate. For AnaptysBio, well, gee whiz, I can't really think of a bad biotech sound, but I will tell you this, this has been my worst stock pick. I think a cinematic explosion is entirely called for here. Rick, give us a glimmer of hope.

Munarriz: All right, here's the hope. Back in November, this November, not the previous November, which we know was so bad for investors, the company said that it had enough cash and cash equivalents and anticipated milestone revenue. It gets milestone payments from Glaxo [GlaxoSmithKline], $20 million from certain milestones with some of the things that are basically going through clinical trials, to fund its operating plan until at least 2023. This is important, because you're AnaptysBio, and this is a company that even though it's not a household name, its advanced seven internally generated therapeutics to the clinic over the last five years, time is the greatest gift of all.

Gardner: Well, thank you very much for that. Yes, it is worth pointing out that AnaptysBio hasn't done too badly in the last few months. It was as low as $14 in October, and the stock is now, as we mentioned, cruising around $24. So, depending on when you bought this stock, you might really like AnaptysBio. I will point out in closing on this one that this company, just like the other five, are all active recommendations today at Motley Fool Rule Breakers or Motley Fool Stock Advisor. We haven't swept any of them under the rug. We continue to hold out hope for each of them. But we also recognize that sometimes you make bad picks in life. I will probably stock a little bit about that at the end of this week's show. But Rick, thank you. That's AnaptysBio, ticker symbol ANAB, down 79.1%, my worst stock pick in the last three years.

Well, let's move on to my second worst stock pick in the last three years. Both of these were featured on last year's show. If you want to go back and listen to David's Biggest Losers Volume Five, January of 2020, you'll hear us in process with both AnaptysBio, which by the way, was in the No. 1 pool position last year's show as well, and here we are with iQiyi, ticker symbol IQ. This is often referred to as the Netflix of China. Well, not at all in terms of its stock performance, I'm sorry to say. I first picked iQIYI at $18.01. It was late April of 2018, almost three years ago, and to think that the stock right now is at $18.60, you might think, well, that's not that bad of stock pick because I picked it at $18 and now it's at $18.60 a few years later. But the problem is this, as the stock soared in spring and summer of 2018, I rerecommended iQIYI, ticker symbol again, IQ. It was June 14th of 2018, it had gone from $18 to $40.5 in less than two months. Having taken a shine to it, I rerecommended it right there at $40.51, which means now that it's back down to $18.60, 2.5 years later, this is my second where stock pick's down 54.1%. So, a really interesting thing, Rick, often I do like to add to my winners and I felt like we had a tiger by the tail back then, it turns out, well, it was a tiger. It was an anemic one and not one of those strong Asian tigers that I thought I'd gotten us all invested in. Rick, what has been going wrong, No. 1, for iQiyi?

Munarriz: Yeah. It was more of a paper tiger, I think. I think instead of the Netflix of China, maybe it was the Blockbuster of China, but I don't want to write it off just yet. Because again, I mean, and I fell for that, the whole Netflix of China thing, and I feel bad because I nudged you toward iQiyi at the time. At the time, yeah, it was the Netflix of China because it was the leading player in streaming in China. Obviously, I think we do this a lot with investing to basically make different industries and different companies in different countries seem more familiar to basically investors, U.S. investors. We play this Mad Libs game where we take a hot stock in the first blank space and an industry and region in the second, and it doesn't always pan out. Sometimes, you're actually right on this, and like MercadoLibre was a company that we called the eBay of South America when it went public and when it entered our universe. Now, eBay would love to be the MercadoLibre of North America right now.

Sometimes it does pan out, but obviously, with this, it didn't. But for iQiyi, it was really hot when it went public. In 2016, revenue more than doubled, revenue's up 55% in 2017, the year before it went public, and revenue was up 44% in 2018. It was doing all right even when it went public. But deceleration was the trend and that's normal. But then we saw revenue declined 16% last year and by last year, I'm sorry, I mean 2019. If we're looking at 2020, this will be single-digit growth for the company. So, this is really not a company that failed. It definitely failed to live up to this Netflix of China or any hot company of China hype.

Gardner: A huge slowdown and it's so often true of our Rule Breaker companies that they are big growers, they're growing fast and the market recognizes that and they trade up at premium multiples because of that growth. If the growth hits the skids for whatever reason, these often end up on David's Biggest Losers Volume X, and that's why iQiyi is a repeat performer. Rick, what's something else that hasn't gone so well for iQiyi?

Munarriz: Yes. Another issue with iQiyi is basically monetization. It works differently, it's not like Netflix. Netflix, everybody pays. Some people start on a free trial, but everybody is a paying subscriber. Most of China and most of basically the iQiyi's users, they're streaming on a free ad-supported version of it, and through most of 2019 and 2020, ad revenue was actually declining for many factors, but it clearly wasn't helping. The saving grace initially, was that premium subscriptions were on the rise, which is why revenue rose in 2019 and held up sort of OK through 2020 until recently, but in its latest quarter, basically at the end of September, we were up at 104.8 million paying subscribers on the platform. That was less than the 105.8 million that were there a year earlier. Netflix has had its hiccups, but if it ever has a year-over-year where actually subscribers have declined, people would sort of panic. I think you saw that here with iQiyi.

Gardner: We were talking about before the podcast started, what is an appropriate sound effect for a movie company that is not getting it done? I think that sound when a film reel runs out and it's just the flipping, back when there was film on actual reels, it wasn't all-digital. Maybe that could be the sound effect for this bad stock pick. All right, Rick, well, there can be a silver lining in every dark cloud, what do you see potentially ahead for 2021 and beyond for this active Rule Breaker recommendation, ticker symbol IQ?

Munarriz: Yes. It's a couple of small things here, but the first is that its ad revenue actually started to turn positive in its latest quarter. While its subscription revenue is now struggling, its ad revenue is starting to pick up again, at least sequentially, and that's nice to see. Also, this is a company that is neck-to-neck, basically with Tencent Video as the leaders in this very important market. Late last year, Reuters was reporting that Tencent and Alibaba, Alibaba is basically just in bronze medals in this market, they were talking to iQiyi majority stakeholder, which happens to be Baidu, a company that's done very well for us over the years about acquiring a controlling stake. It didn't pan out and of course, we don't even know if the chatter was true, even the writer is pretty credible, and we were talking about this for months last year and in 2019. But the chatter, it does validate the fact that iQiyi is an important player, whether Tencent or Alibaba step-up in 2020, not that we have the stock as a bio candidate at all. Just the fact that they're interested basically justifies the fact that iQiyi is still an important company and a player with a very large audience.

Gardner: All right and yeah, it is worth reminding ourselves, this is still a pretty substantial company. A lot of times, stocks that have been cut in half or worse for me end up down in the micro-cap ville. But Rick, this company's market cap is just over $14 billion as we speak today. By the way, I didn't mention AnaptysBio is in a micro-cap mill, our first stock by biggest loser is only a $650 million market cap these days, but gee whiz, iQiyi over $14 billion. This is not a company that's going to go out of business anytime soon.

Munarriz: Yes. Definitely.

Gardner: All right. My third worst stock pick of the last three years. We're going to go over to the Motley Fool Stock Advisor service for this one, this is my worst Stock Advisor pick of the last three years, Hawaiian Holdings (NASDAQL HA), the ticker symbol on the Nasdaq is HA. This is Hawaiian Air. This is a product I've enjoyed. I wish I could have enjoyed it more in my past, but back when the world traveled, do you remember those days, everybody? Yeah. I went to Hawaii a couple of times and I remember going on a Hawaiian Airlines airplane and enjoying the experience and thinking, "Wow, these guys are really well-positioned," because it's not quite a monopoly, but they dominate back-and-forth U.S. mainland to Hawaii and back, and a few other places too. Unfortunately, things haven't gone so well for the travel industry and when you have a lot of airplanes that aren't flying that you need to keep maintaining, well, that can be very costly. Hawaiian Air, I first picked on January 17th of 2019, so that would be two years ago this month. There's something about January where I don't pick good stocks. Anyway, the stock back then was at $32.78, just check the price here, the market close on Tuesday, January 5th, and it's gone from $32.78 down to $18, even that is a loss of 45.1%. Rick Munarriz, have you ever flown Hawaiian Air?

Munarriz: I have. I've been to Honolulu a few times. Flying out of Los Angeles, and I don't know if they fly from Florida all the way over there, but I have connected from basically California to Hawaii once or twice.

Gardner: I hope you enjoyed that, but Rick, things haven't been going so great for Hawaiian Air in the last couple of years. I think many of us can probably imagine why, but what's thing No. 1 that presents itself to your mind?

Munarriz: Yes. The pandemic, of course. Hawaiian Airlines, they rely on leisure and luxury leisure tourism. Folks, obviously, aren't going to Hawaii, they didn't go to Hawaii last year and the others, they also clamped down. The state had a mandatory 14-day quarantine with a proof of a negative COVID-19 test for anyone traveling into Hawaii. Even if you wanted to go to Hawaii, there were a lot of hoops to jump through, and whether it was enforced or not, you still had to make it a long trip and in theory, staying quarantined. A lot of people just said, "I'm just not going to go to Hawaii this summer," and that basically happened. Hawaiian Airlines is actually fearing worse than most of its other domestic rival airlines. Delta, American, and Southwest, they've all seen their revenue over the trailing four quarters decline in the low-to-mid 40% range. Obviously, it's been far worse the last two quarters, I'm just using the last 12 months, which includes the fourth quarter of 2019 and the first quarter of 2020 before everything started to go really soggy. But Hawaiian is at a 50% decline in revenue over the trailing 12 months versus the same months before, so clearly, it is a bad time to be an airline and it was even the worst time to be Hawaiian Holdings, the parent company of Hawaiian Airlines.

Gardner: It's just such an unfortunate timing and horrible timing on my part. It's even a little scary for me to say what the market cap of this company is because I think when we fly a company, we use the company's services, and they're an airline company, we want them to have a big market cap. I think big market caps make us feel safer as passengers. I do regret to mention that Hawaiian Holdings' present market cap is below $1 billion. If and when any of us flies Hawaiian Air again, we'll hope the stock is back up over $1 billion, because I don't think I want to be flying too many micro-cap airlines. Rick Munarriz, what's thing that's gone wrong No. 2?

Munarriz: The other reason to fasten your seat belts and for a bumpy ride is that business wasn't so hot even before the pandemic. Obviously, we know 2020 was bad, but 2019 wasn't so hot either for Hawaiian Holdings. Revenue dipped slightly, just down 0.2%, but still negative for all of 2019, it only had 11.7 million revenue passengers that year, down from 11.8 million a year earlier. Hawaiian Holdings, they said, "Oh, it's just a competitive environment," as other players are trying to just take some of that business. But generally, it's just some rough time for Hawaiian tourism and for Hawaiian Airlines even before the pandemic. So yeah, this was obviously bad last year, but not so hot in 2019 either.

Gardner: Well, speaking of glimmers of hope, Rick Munarriz, I hear there's this thing called a vaccine. Vaccine may be at play here in 2021, your thoughts?

Munarriz: Yes, there's definitely good hope that we will get out of this at some point this year. It's not all [...], pardon the play on words, when it comes to Hawaiian Holdings. So, on airlines, while they have been hit hard, fuel prices are low, and so were the expectations and last month basically in December, Hawaiian Airlines introduced four new domestic routes, including three new cities that will be flying in the spring. It's also important to remember here with Hawaiian Airlines, and I mentioned this earlier, but it's important to connect this, this is mostly a travel airline. There isn't a lot of corporate travel to Hawaii. I know they have some conventions there and stuff like that, but there's not really a lot of business travel. Even though that may not make much sense right now, I think that while there is pent-up demand for folks to travel again for leisure, I don't think the same will hold true for corporate travel, or a lot more of that in the future is going to be done through video conferencing or virtual means. I think Hawaiian Airlines should go from one of the worst performers among airlines over the past year, on a trailing basis, to one of the better performers. Its business will pick up faster, then we will have others that are relying on business meetings, and travel, and corporate events to be happening. I think Hawaiian Airlines has a brighter future from this point on, than many of the other air carriers out there.

Gardner: Well, we will be watching, won't we? How many times in the last few months have I heard people point this out, maybe you've heard this too, Rick, that after the epidemic, the flu pandemic of 1918, the roaring 20s showed up. I can only imagine that if 2021 or 2022 becomes a great big party, and darn it, I sure hope that they do. I could imagine a lot of people might like to party in Hawaii. Let's keep our fingers crossed for Hawaiian Air that it can make it through an absolutely brutal environment for a small plane carrier.

Munarriz: I will bring my zoot suit and we will take a plane to a speakeasy in Honolulu, David.

Gardner: Thank you, Rick. Thank you for bravely shouldering the burden of talking about my three very worst stock picks. Again,AnaptysBio down 79%, iQiyi down 54%, and Hawaiian Holdings down 45%. Rick, talk to you again soon.

Munarriz: Thank you, David.

Gardner: Well, I think it's fair to call this halftime. Three down, three to go, and sometimes on the show, we use halftime to bring out the marching band and have some follies. That's exactly what I've designed for this week's show. Because one thing that jumps out to me is that these bad performers actually haven't been that bad. In years past, David's Biggest Losers has been full of stocks that have lost 80% or more of their value. This year, the next three that are coming are all down about a third or so since I first picked them in the last three years. Why would that be? Well, I think we all know why that would be. The stock market has been amazingly strong. In fact, I'm looking at Motley Fool Stock Advisor, I've made 36 picks, one per month over the last three years. It's from that group of 36 that we've selected, for example, Hawaiian Holdings, which has been such a bad stock pick, but nine of the 36 picks that I've made in Stock Advisor have doubled or better in the last three years, that's inside of three years, and 28 of the 36 are making money. It's slim pickings when you're looking back over the last three years thinking about how strong the market has been, and wow, over in Rule Breakers, I've picked two stocks every month over these last three years. That would be, 24 times 3 is 72 picks. Out of those 72 picks, get a load of this, 61 of them are up, 11 are down, so that's a pretty high hit rate, but here's a really high hit rate; of the 72, 33 of the picks have doubled or better, that's all inside of three years. I even took the time to [...] this up because it was quite amazing. We've had 16 two-baggers, eight three-baggers, five four-baggers, one five-bagger, two six-baggers, and one 10-bagger.

For people who are new to this talk, when I say bagger, it means a two-bagger has doubled its money. It's made a trip around the basis, which is where Peter Lynch's long time metaphor has come from the sport of baseball. When I say we've had 16 two-baggers, 16 of our 72 picks in the last three years have doubled, and wow, 8 three baggers, etc. MongoDB on its own up 10 times, pretty much wipes all of the bad stock picks that you're hearing about on this week's show for anybody who's owned MongoDB. I'll now ask the marching band to put down its instruments and begin to settle down for the second half. But it's worth pointing out just how incredibly strong the market has been, and in particular, how incredibly strong the Rule Breaker investing strategy and these kinds of companies that we've talked about on this podcast, not just for the last three years, but for the last six years now that we're into 2021, just how strong that strategy has been rewarded in recent years. It's very unlikely we'll see anything like those numbers over the next three years, because it's been so tremendously spectacular.

Now, I'm not sounding a bearish note. I think the market is going up this year and it does go up more years than it goes down. But it's worth reminding ourselves, especially for newer investors, pinch yourself. It's very hard to ever put up numbers like this on any consistent basis. I myself am amazed by the performance of Motley Fool Rule Breakers and Stock Advisor here over the last three years. All right. Well, for the second half, I would like to welcome back another one of my guest stars. It is my longtime friend and analyst, Karl Thiel. Karl, welcome back to Rule Breaker Investing.

Karl Thiel: [laughs] Hi, I'm glad to be here.

Gardner: Thank you very much for graciously consenting to look over some of my very worst picks over the last three years. Karl, could you give a sentence or two about who you are, and maybe one past work experience for you? What did you do before you came to The Motley Fool?

Thiel: Among many things I have done, from shoe salesman to record store flunky in my extreme youth, I worked on a biotech mutual fund at one point, shortly before I came to The Motley Fool. That explains a little bit about what I do. I'm an analyst on Rule Breakers and on Stock Advisor. Been with the company about 16 years and have a special love of healthcare, but not exclusively that.

Gardner: Well, and we're not going to be talking too much about healthcare as I look over these three particular companies, Karl, but like so many Motley Fools, you are a five-tool athlete, you can do it all, so let's look across a Motley array here of companies. Worst stock pick in the last three years, No. 4, Nutanix (NTNX), ticker symbol NTNX. Took a shine to it March of 2018, the stock was at $47.94 back then. It closed Tuesday of this week at $31.09, that means it's down 35.1% over the last three years. Karl, what is something that has gone wrong for Nutanix?

Thiel: Okay, I'll just give you a few quick numbers. In the company's fiscal 2017, revenue grew 68%. In 2018, it grew 37%. In 2019, it grew 7%, and in 2020 it grew 5.8%, and it's actually a tick lower than that now for the trailing 12 months.

Gardner: How?

Thiel: They have just had straight up poor execution of sales. Now, the numbers I'm giving you are a little bit tweaked by the fact that they've also been shifting to a subscription model, and so that means less upfront money, more deferred revenue that does tweak those numbers, but that does not explain all of it. They have acknowledged that they have just been doing a poor job with lead generation and following through on sales.

Gardner: A lot of people will not know anything about Nutanix, and I wish I didn't know anything about Nutanix [laughs] at this point, but would you just briefly lay out, what is this enterprise software company that's transitioning from enterprise sales, the older format to the more clouded sales these days, which has been very promising for so many companies that have done this over the years, but what is Nutanix doing?

Thiel: I don't want to pretend I know this company better than I do. You'd have to ask our fellow analyst, Tim Beyers, for a truly expert take, but they do hybrid Cloud solutions. The idea is if you want to have part of your business in the Cloud on something like Amazon Web Services, but you also want to own your own equipment, and be integrating those two things together, this gives you the operating system for your equipment and the software to tie it all together, something that they have called a $100 billion market.

Gardner: Well explained. An hyper-converged infrastructure is some of the jargon used around this company. It reminds me how truly complicated Cloud software and the whole business can be, and this is one of the harder ones to understand, which by the way, goes against Peter Lynch's old dictum that you should be able to pitch anybody the stock in a quick elevator ride at 60 second as to why you're investing in that company. Sometimes in the past I've said great stocks don't make me think. Unfortunately, this one does make us have to think quite a bit to understand what Nutanix does. Karl, what's something else besides the huge sales slowdown that hasn't gone so well for Nutanix?

Thiel: In addition to that, and just the growing pains with switching over to the subscription model, I don't think it helped that the company's founder and CEO, Dheeraj Pandey, stepped down surprisingly in August, there was really not very much warning of that. I think that just added to the sense of disarray at the company.

Gardner: Indeed, since this is now our 6th episode, our 6th year in a row of doing this, two of the big themes that always come back each year, are sales slowdowns and change in management, especially when the CEO has left recently, or if the co-founder takes off, or both of them do, if they're not the same person. These are often some of our worst companies. When I think about the Cloud and Enterprise and I think, what is the sound that could emerge, a scary sound from clouds. I'm not sure it actually emerges from clouds, but thunder seems to attend to clouds, and it is an awfully scary sound. I sure wish I heard this sound just before I picked the stock because maybe I wouldn't have.

Karl, is there a reason for hope? I'm hearing you talk about how the company's transitioning over to the Cloud. That often can make financials look bad in the near-term, but improve after that.

Thiel: Yeah. I think that's the case here. You mentioned hyper-converged infrastructure, which is very jargony, but I will say that the research firm Gartner has a magic quadrant for hyper-converged infrastructure software. Just a few weeks ago, Nutanix was named a leader and the runaway leader for the fourth year in a row. They haven't lost their edge in this market. I do think the market is a good one. They're just having a really poor job with execution and just some growing pains. I think once they start to move back through those growing pains and can right-size some of the stuff, they still have a pretty decent opportunity.

Gardner: Well, some of David's Biggest Losers every year do bounce back. In fact, I'll be closing the show with how last year's list has done since last year's show to this year. It's fun to look back on these. I will point out, Nutanix has been a pretty strong stock. The stock was down around $15 in April of last year. Now, eight months later, it's doubled, which isn't a bad eight-month return. Often, some of my worst picks are just because I timed them wrong. I should've bought that other quarter, not that first-quarter. Whatever I did, I did it wrong. Let's leave Nutanix right there, stock No. 4.

Now onto worst performer No. 5. The ticker symbol is BZUN, this is Baozun. It was at $54.5 in June of 2018. 2.5 years later, it's gone from $54.5 to about $35.5. This stock is down 34.7%. Earlier, Rick and I were making light of saying things like the Netflix of China. I always love "the Elvis of Mexico." We have this tendency as Americans especially, I think, to try to relate other cultures to pop-cultural phenomena of our own. Baozun, we've sometimes said in the past, Karl, the Shopify of China, but in the same way that iQiyi hasn't exactly performed like Netflix, Baozun has not exactly performed like Shopify. Karl, what's been happening with Baozun?

Thiel: You were just talking about, with Nutanix, how maybe if you had bought it at a slightly different time, recommended it at a slightly different time, things would be different. That is truly the case with this one. Not to pour any salt on wounds or anything, but if you pull up a five-year chart of Baozun, there's this big peak right around June of 2018 [laughs] and then it comes straight down.

Gardner: I hit it perfectly.

Thiel: This one is really more of a flat performer for the last couple of years than it is certainly not a falling knife. It's just been moving sideways. I think there are a few reasons for that. Certainly, one is the volatility of the Chinese economy, or really the slowing of the Chinese economy. I personally find this hard to wrap my head around, but the economic growth of China of 6.1% in 2019 was a 30-year low.

Gardner: Incredible.

Thiel: Amazing. It has slowed since then. Bottom line, this company basically helps foreign brands to have a presence in the Chinese market and those are typically higher-end luxury goods. If the economy is slow, then there is always the risk that the sales do not do well.

Gardner: I neglected to mention earlier, Nutanix's market cap, which is right around $6 billion. Baozun, also having lost a third of its value in the last few years, is right around $2.8 billion on the key data I'm looking at on the Nasdaq site right now, it can sometimes be a little confusing with ADRs. I think I have that one right, Karl. But $2.8 billion, that's nothing to sneeze at. Like iQiyi, which we mentioned earlier, it's not like this company is going to disappear anytime soon. Karl, what's something else that has not gone so well for Baozun and/or its shareholders?

Thiel: Well, I think contributing to investor discomfort has certainly been the trade war, it has been a factor. Then I think more recently, the company just did a really big share offering with 40 million new shares worth of dilution. That was back in September. I think that, again, just is a little bit more discomfort for investors.

Gardner: All right. Well, anytime a company adds more shares into the market, more people are buying it, but that does dilute all existing shareholders, which doesn't usually make existing shareholders that happy. But sometimes it can be a neutral, as opposed to merely a drawback because after all, the company did raise money and it can then deploy that toward its growth. Nothing specifically comes to mind in terms of what is an appropriate sound effect for me for Baozun. I'm just going to ask Rick Engdahl, who is a musician himself, and has deep musical knowledge to place a brief snatch of a really sad song.

Gardner: Lacrimosa indeed. This is a company that's been a little bit spotty on its growth, but it is a company by the way that is profitable. We're not talking about a fly by night company hoping one day to make a profit. Baozun is profitable. Maybe there's some hope there. Karl, do you see any other hope for ticker symbol BZUN?

Thiel: Well, this one was easy. I feel like this company has been a little bit unfairly beaten up. They never really stopped executing growth, given all the difficulties we just mentioned with China's economy. It still grew solidly over 2020. At some point, if you keep growing while your stock-price remains the same, something's got to give. At this point, they are trading at less than 20 times projected earnings for 2021. I think until there's nothing actually broken with the story here and it looks pretty good going forward.

Gardner: Well, that's good to hear. This is one of those stocks, and I never look at charts in this way, I'm having fun with this, but anytime and whenever $42, you should've been selling in the last year, and anytime it went down below $32, you should've been buying because it's been a sign wave stock here. It looks like a cyclical, but this is not a cyclical company, at least that's not our expectation or hope. Well, again, all of these six stocks I've already mentioned more than once remains an active recommendation, in this case for Motley Fool Rule Breakers. We fellow Rule Breakers, generally happy few, will hope for better things for Baozun in the couple of years ahead. This is also a 2018 bad pick though. This will be the last time it shows in the David's Biggest Losers podcast, because we only look back three years and by January of 2022, we will no longer see 2018, which seems like the year where I picked all of my losers, but also some of my very best picks I've made in the last few years. Funny to note that.

Well, Karl, let's go onto the final one then. Really all three of these stocks that you and I are talking about are all down right about the same amount. BlackBerry (BB -3.14%), ticker symbol BB is my sixth-worst pick over the last three years. It was at $10.33 in mid-July of 2018. Less than 2.5 years later, it's gone from $10 and a third, down to $6.66. BlackBerry is down 34.5%, just enough, just down enough to make this podcast. Now, Karl, this is a company a lot of us know. We remember how BlackBerry dominated corporate email, in particular mobile email on the go in the 1990s. The company these days has really tried to transition after getting absolutely whacked by the Apple iPhone. It's been transitioning into cybersecurity. What has not been going well for BlackBerry?

Thiel: BlackBerry makes its money in a few different ways. It was always known for its handsets for having high levels of security. They were favored sometimes as corporate devices, for simply that reason, and that's really what BlackBerry doubled down on when it changed its name away for Research in Motion. It makes money from its security business, from its IoT business, and from its licensing. On the security side, it made a big acquisition. It's the biggest, I think ever, all-cash $1.4 billion acquisition of Cylance in 2018, and it just hasn't worked out all that well. Even though BlackBerry has eked out some growth, the software and services side of it has dragged it back a little bit. Because they're specializing in endpoint security, so how do you protect this laptop, this device, and everything in a corporate network? In a work from home time, you would think that that was doing really well, but it's been no CrowdStrike, let's put it that way.

Gardner: Well, I can only imagine any way the difficulty of trying to transition from the BlackBerry that was to the BlackBerry that will be and still remain a going concern. In a lot of ways, it's impressive what this leading Canadian company has managed to do. Its market cap, by the way, $3.7 billion today, a fraction of where it was back in the golden times. But Karl, we've been promising two things going wrong for each of these companies. What's the second thing beyond that Cylance acquisition that hasn't been going so well for BlackBerry?

Thiel: Well, I mentioned two legs to this tool. Another leg is its licensing business. Even though they're not really in the handset business anymore, they own some 38,000 patents and they license them out. There are BlackBerry devices that are made using those patents. But this is a go-nowhere business. At the same time, it's still significant. They're looking at this to shrink in the current year. It's just hard to see this becoming a major growth driver. It just becomes an important leg but a shrinking one, which is a little bit of a weight on the company.

Gardner: For this bad sound effect, I'm thinking BlackBerry, makes me think of berries, a juicer. There's got to be a juicer sound because the stock has been juiced.

All right. Well now, let's turn toward the positive, and you don't have to look very far back to find a real positive. This stock was just hanging around $5 a share in November. All of a sudden, I think it was an earnings report right at the end of November. It all of a sudden, gapped from $6 up to nearly $9. It was up almost 50% in the first few weeks of December, again, just a month ago, settling just below $7, but that was an outstanding recent performance. Often, Karl, I think the market likes to look ahead. With the stock surging, do you see some reason for optimism here for BlackBerry in 2021?

Thiel: Well, this is the reason why stools have three legs. There is a third one, [laughs] and that is the IoT business. That looks pretty promising going forward. I think one of the big catalysts has been a recent deal with Amazon Web Services that BlackBerry announced.

Gardner: That's right.

Thiel: They have their QNX operating system, which is particularly used in vehicles. The idea is to create a standard secure operating system that auto manufacturers can use to develop vehicle apps or connected services. They have about 50% market share, but the rest of the market, from what I see, is very fractured. Partnering with Amazon Web Services and saying, "Look, this is going to be fast, easy, and secure for you to develop some new connected service for an automobile." That makes it pretty appealing to adopt QNX and make that more of a standard. I think that is a definite piece of good news for them going forward.

Gardner: All right. You're absolutely right. I think I misspoke it. It really was that Amazon Web Services announcement. I see now it was on December 1st. Just one month ago, that really did catapult BlackBerry stock. Let's hope for some continued better things in the months ahead. Well, Karl, I want to thank you very much for reviewing three more of my very worst stock picks for the last three years. Do you have any overall reflection before I let you go?

Thiel: Honestly, when you gave me these picks, I was like, "Really, just like 30%-some? That doesn't seem bad for [laughs] considering how much we swing for the fences from time-to-time." I thought this is a pretty tame list.

Gardner: Well, it is true. I guess if we do the math, we picked 108 stocks over these three years in Rule Breakers and Stock Advisors. Out of 108 for our sixth worst to be down 34%, I think I'd probably take that most three-year periods. It has been a remarkable time. Well, Karl, thank you so much once again for your contribution in Rule Breaker Investing.

Thiel: Thank you.

Gardner: Well, after so much sturm und drang and some sad moments, some sad songs and sounds and regrets for bad decisions acted upon, I did promise earlier in the show that there might be some more light at the end of the tunnel. It comes in this form. Each year, for David's Biggest Losers, I've enjoyed looking back at how the ones from the previous year did in the ensuing 12 months. Now, we're going to go back to last year's show where I covered six stocks. Once again, the six worst performers of the previous three years up to January of 2020, and let's see how each of them has done.

Trivago, on last year's show, was the second worst performer. It was at $2.75. I'm sad to say that it's gone from $2.75 down to $2.25 since in the last year. It's lost again about 20% of its value. I'm even sadder to say that we parted ways with it earlier this year at $1.60. In other words, it's actually come back some from when I decided this console, at least, finally to sell the stock in Motley Fool Rule Breakers. Trivago has been an underperformer. Another underperformer, and I referenced that earlier, was iQiYi which we've already covered in this show, was at $23.5 a year ago when it was also on David's Biggest Losers. But this year, it's gone from $23.5 to $18.5, so not such a good year for iQiYi.

AnaptysBio, ticker symbol ANAB. Yes, it's still well down from when we first picked it years ago. But I'm happy to say, in the past year, since I featured it on last year's show, it's gone from $15 last year up to $24 this year. That's a 60% gain, but it gets better from there, because Camping World Holdings. Marcus Lemonis, the CEO of Camping World Holdings is also the star of the CNBC show, The Profit. Marcus Lemonis went to Rick's High School. I remember him mentioning it last year. Well, it's been quite a year for the RV industry, as we would all understand, and Camping World Holdings was at $13 when it was featured on last year's show, one year later, it's at $28, more than a double.

Then, the star of that show now looking back, Upwork (UPWK -1.58%), ticker symbol UPWK. This is a company that supports the gig economy. It competes with Fiverr, for those who know Fiverr. Upwork, a year ago, was featured in two of the six slots. That's right. I recommended Upwork. It went down. I recommended it again. It went down even further. Upwork was No. 4 and No. 5 on last year's show when it was around $10 a share, while Upwork today is at $34.5. I think a basket of buying the dogs of last year's David's Biggest Losers has been a market beater, thanks in no small part to Upwork, but certainly, Camping World Holdings and AnaptysBio making contributions as well.

A few quick thoughts just to close, three of them for you. The first is losing is normal. We're learning how to skate as we invest. If you've ever learned how to skate, either on roller skates or high skates, you know that you fell, you fell a lot, and that's when you're learning skating, but I think investing is permanently like learning skating. That is 35 years after I've started, I still fall all over the ice. Look what we've just featured this week. All of these bad stock picks I've made, you'd think I'd have gotten better, but no, I think losing is always going to be part of investing. This is normal, my friends. Second thought. We like to talk about our losers. I actually had some fun with this show, I hope you did too. Being transparent is so important to us at The Motley Fool.

We try to be a financial source for you that's going to give you accountability. We own all that we do. I realize the Internet, especially, as a powerful medium net regard, because I've been able to just look at the scorecards that we published for all our members and pull these stocks write-off of them, and give you the prices where they were then and where they are now. I've always loved that the Internet is a medium with a memory. TV by contrast, a lot of people get financial advice from TV. TV, in my experience, has no real memory. There are people who make constantly unaccountable claims all the time making stock market calls on individual stocks or the market at large, and no one really ever remembers what they said, because they're not looking to be transparent and accountable. Well, that's what I love doing on this show.

Third, and finally, don't live in fear of losing because you'll never really win. You'll never have the moon, a beautiful song's lyrics once went. Losing to win is one of my big themes, and it even won a Bestie last year because it was one of my favorite podcasts that I got to do for you last year. If you want to hear me talking even more about my miserable losers, go back just a few months ago, and listen to my Losing to Win podcasts. We're talking shot in Freud City here. But a reminder, part of losing to win is that your winners will so far outweigh your losers if you just give them time to do so. In that dynamic world of stock market trading that is so often depicted in ads or people throwing up pieces of paper, it used to be on the floor of the New York Stock Exchange. A lot of you and me, a lot of individual mom-and-pop investors came away with the idea that we had to be very active to do it well. Well, I've never felt that doing it well involves being very active. In fact, allowing your losers to lose and your winners to win, in my experience, almost always pays you far beyond what you would have thought. Patience is at the heart of this and not living in fear of losing because you'll never really win if you don't allow yourself to lose.

Maybe I'll mention one final stock here at the end then, because it was Volume 2 of David's Biggest Losers, January 2017, when at the time I was including this company, Restoration Hardware. The company is now called RH. They have shortened their name just to RH. The ticker symbol remains RH, but it was presented again four years ago. This week, when I did David's Biggest Losers, this is the ultimate comeback stock. It was at $25 back then. I featured it last year's show with some more Rocky music, because it had gone from $25 to $225. That's right, up nine times in value, since we featured it on this show four years ago as one of my biggest losers. Darn it, over the last year, if Restoration Hardware, RH, hasn't doubled yet again, from $225 a share to $450 a share, so that 18 times return on its own, again, will wipe out all of David's Biggest Losers that have ever been featured on this podcast series. I hope you're taking that lesson to heart.

Well, thanks again for joining with me here at the start of 2021. On next week's show, I'm going to be talking about how to build and maintain a portfolio. This is one of those conversations that keeps happening with mailbag entries that I speak to over the years. But I really want to definitively speak next week to how to start a portfolio, and then how to maintain a portfolio, the Rule Breaker way. We have that to look forward to. In the meantime, have a great week. Fool on!