When many of us who've been investing for a while see words like "10,000 bags" in an article, we begin salivating. "Bagger" is a term reflecting an investment's performance, you see. So while a three-bagger would be an investment that tripled in value, a 10,000-bagger would have increased your investment 10,000-fold. Who wouldn't drool at that prospect?
I recently saw a headline featuring the words "10,000 bags," but it turned out to be a USA Today article titled, "Airlines lost 10,000 bags a day in 2005." Yikes! But as I read the article, I gained a few insights into how people like you and me can be better investors. (I also thought about whether I should stop checking my bag.)
First, permit me to recap the story. It seems that 2005 was an especially bad year to check your bags, since lost luggage rose by 23% over the previous year. Leading the hall of shame was US Airways (NYSE:LCC), with 9.62 bags lost per 1,000 passengers, up 81% over previous-year levels, followed by Delta, with 7.09 and a 37% increase, and AMR's (NYSE:AMR) American Airlines, with 5.92 and 25%. Even Southwest (NYSE:LUV), arguably the most impressive airline out there, lost 4.25 bags per 1,000 passengers, up 27% from 2004. The article cited several reasons, including "a surge in the number of passengers, airline budget cuts, backed-up flights and tighter inspections of luggage."
Now, though I doubt the article would make anyone expect to generate a 10,000-bagger investment in the airline industry, I'm afraid that some investors might get the idea that it's a great industry in which to find some temporarily downtrodden stocks. So here come some lessons.
Don't fall for fallen stocks
One lesson that jumps out is that we should think twice about investing in troubled companies. For example, Delta Air Lines has filed for bankruptcy protection and its shares recently traded for around $0.44 each. If this attracts you because you think it doesn't have far to fall and will eventually get its act together, think again. For one thing, if you invest and the stock falls by just $0.22 per share, you'll lose half your money. And stocks that have fallen a lot might still be on their way down. Likewise, bankruptcies also often leave common stock investors with nothing but sad memories.
It's true that sometimes buying more shares of fallen stock can be profitable. The time to buy is when you are convinced, after research, that the company's problems are temporary, and when you're proven right. An example of this would be David Gardner's November 2004 recommendation of Netflix (NASDAQ:NFLX) in our Motley Fool Stock Advisor newsletter. Two months later, the stock had dropped in price, so David re-recommended it. The shares are up about 70% since the November recommendation and even more, some 100%, since the January recommendation.
Be careful with troubled industries
Another lesson is to pay attention to the characteristics of an industry. Southwest Airlines, for example, might make many investors swoon with its long history of profitability, and many investors are hopeful about relative newcomer JetBlue (NASDAQ:JBLU), though its shares have lost altitude lately. (JetBlue was also recommended in Stock Advisor, where it's still in the red.) But it's important to remember that the airline industry has historically been a poor performer for shareholders, for many good reasons. For example:
- It's a capital-intensive business. Buying planes costs a lot of money.
- Airlines usually have to fly each flight, even if a flight is only half full. The emptier a flight is, the less revenue it generates.
- Price wars: If one airline cuts fares on certain routes, others tend to follow suit, resulting in reduced profitability.
- The rising price of fuel can put pressure on profitability.
- Bad weather can decrease the number of people flying and the number of flights able to take off and land.
Even troubled industries contain winners
You can still make money in a challenging industry if you choose your investments carefully. In the airline world, against all odds, Southwest has tripled investors' money over the past decade and increased it by nearly 20-fold over the past 20 years. That clobbers the performance of most other companies out there.
Another tough industry in which you'll run across lots of baggers is supermarkets. Companies in this arena face sizable labor costs, traditionally thin profit margins, and now the prospect of competing with the likes of Wal-Mart. It isn't a pretty picture. Stephen Simpson reviewedKroger (NYSE:KR) a while back and didn't find it a compelling investment, despite second-quarter revenues that rose nearly 7%, operating income up 14%, and net income up 38%. Maybe the 25% gross margin, 3.4% operating margin, and 1.6% net profit margin had something to do with it.
Yet amid all this difficulty is Whole Foods (NASDAQ:WFMI), which has been making its investors rich as it focuses on providing high-end products, such as healthy and organic fare, to its customers. Shares have grown by nearly 15-fold over the past decade. (The company was also recommended by David Gardner in Stock Advisor, after Tom recommended it twice and gained more than 75% on each recommendation.) Are the shares a bargain now? Well, the firm's gross margin of 34% and net profit margin of 3% certainly outshines most of its competitors, but its forward P/E ratio of around 40 seems on the steep side, above its average P/E over most of the past decade. For further insight, you can read Salim Haji's thoughts on the company's future.
Leads to good ideas
If you're in the market for some compelling investments in a variety of industries, I invite you to take advantage of a free trial of David and Tom Gardner's Motley Fool Stock Advisor newsletter. Over roughly four years, the brothers have lapped the market, averaging returns of 52% and 76%, respectively, vs. 22% for equal amounts invested in the S&P 500. About 20 of their picks have more than doubled in value, nearly 10 have more than tripled, and 3 have more than quadrupled. A free trial of their service will give you access to past issues and a chance to review every single recommendation and how well it's done. You've got nothing to lose by checking it out.
Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Netflix. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
