This Is Why Investors Should Never Sell a Stock Based Solely on Bad Headlines

With a 24/7 news cycle and a constant stream of information, it's easy for investors to get carried away by headlines and make rash decisions about their portfolio. In this segment of Backstage Pass, recorded on Dec. 15, Fool contributors Rachel Warren, Danny Vena, and Connor Allen discuss a recent example of this and why selling based on headlines can be a massive mistake for long-term investors.

Rachel Warren: So, Roku (ROKU -0.61%), we're going to be talking about Roku. The stock has had a little bit of a tough time lately. Shares have plunged earlier in the year when it seems like the company was at an impasse with Google about keeping YouTube apps on its platform, then rose again when the company's reached an agreement, now shares are plunging again. The stock when I had checked earlier, had fallen by more than 10% just today.

Why is this? Well, there was a press release that came out from a company called Universal Electronics, which last year filed a complaint with the U.S. International Trade Commission against Roku. The press release said that the ITC publicly issued its favorable final determination in their patent infringement case against Roku, concluding that several Roku products infringed their patent and effectively barring the importation and sale of those products.

According to Universal Electronics, they were saying the ITC's opinion made clear that Roku's products infringe various claims of its patents, and that the commission issued a limited exclusion order which bars Roku from importing any infringing TVs, set-top boxes, remote control devices, streaming devices, and sound bars. Here's the question, should investors be worried about this and if not, what does this tell you about the pitfalls of investing based on news headlines? Danny, I know you have some thoughts on this one.

Danny Vena: I do have some thoughts on that. I actually covered this story this morning. When you see the headline that the International Trade Commission, U.S. and ITC rules against Roku. This was a little bit of theater on the part of Universal Electronics. For those who have never heard of this company, they make universal remote controls. If you go and you buy a universal remote control at Walmart, it probably uses Universal Electronics' technology.

The issue that was before the ITC was how Roku's remote communicates with its electronic devices. Universal Electronics said that Roku had infringed on its technology and the ITC agreed. But here's the thing, when the U.S. Trade Commission, if you read and I actually read the release that it dropped on its website today--

Rachel Warren: A little light reading.

Danny Vena: Light reading. Roku said it had already developed a workaround that bypasses that patented technology. It's already fixed the issue and the ITC in its ruling said that the revised Roku Ultra and sound bar products do not infringe on the asserted claims.

You can go back about a month ago, Roku's Vice President of litigation and intellectual property Joe Hollander said, that this fully absolves the company noting that it had already redesigned around the offending patent. This is all old news. This was just the final order. We got the ruling from the trial judge a couple of months ago. We've known about this since September.

This is just a final ruling from the ITC. Nothing changed between then and now except for the fact that they affirmed the trial court judge's ruling that said that Roku's revised products do not infringe on the patent. This is a case where there really isn't anything to see here. Move along, folks.

Rachel Warren: Wow. Definitely a lesson to look beyond the headline for sure. What about you Connor, what are your thoughts?

Connor Allen: I'm honestly just impressed that Roku was able to build out a new sound bar and ultra so quickly in order to get around the patent infraction. But Danny, I think you hit on most everything about this thing. But Roku overall, I just want to talk about Roku. It's a stock that I really like. They've got 56 million active users.

They are in a lot of people's homes. You talked about Roku TV, you talk about branding. I think this company has a lot of brand value, especially because people call them Roku TV's even though Roku doesn't make the TVs. They're made by TCL and Hisense and a variety of other companies. But in 2020, they had some ridiculous growth in their use. They added 14 million users.

Then this year, we've seen some slower growth and the stock has gone down a lot, including today when that press release came out. But I will say, the growth of active users has gone down. I think they've added 4-5 million this year versus 14 last year.

But their average revenue per user has gone up 49% year-over-year. They're figuring out how to grow the business without growing active users. I think that's really important. You see that with companies like Netflix. They have so many active users, but how are they going to monetize them more? That's the biggest question. Roku looks like they're figuring that out so I'm a big fan of Roku.

Rachel Warren: Thank you both for sharing both of those points. Those are great. I think this was a very interesting story, Danny brought this one to the table today.

For me my takeaway here, I think it really reiterates why you have to look beyond the headline as an investor. I honestly think, there's a lot of factors we've talked about that are driving the volatility we're seeing in the stock market right now. But I think some of it is you have a lot of investors that look at the headlines and make impulse investment decisions.

I think what happened with Roku today is evidence of that, because one headline should not make or break your assessment of a quality business. The news moves so fast nowadays, almost faster than investors can keep up.

Definitely a poignant reminder to when you see maybe some news about a company that you own and it concerns you, dig a little deeper, see what's line beneath that headline. It may not be as bad as you think and it may not have anything to do with the underlying business.

As Jason Hall always says, add a day. If you're thinking about making a move on a stock, sit back, add a day, see how you feel the next day. I think it's a good point to live by as an investor.