Investing in stocks is one of the best ways to build wealth over time, as the returns that are available from the market's best high-growth companies are simply extraordinary. If you can find and invest in the next great growth stock, it's possible to become a millionaire from a modest initial investment.
While there are plenty of great growth companies to choose from, they are not all created equally, and many of them are destined to to disapoint their long-term investors. We asked a group of Motley Fool contributors to each give us a stock idea that could become a huge winner, but more than likely simply won't work out. Read below to understand why our contributors think that Fitbit (NYSE:FIT), MannKind Corporation (NASDAQ:56400P706), and Blue Buffalo Pet Products (NASDAQ:BUFF) are stocks you should probably avoid.
Selena Maranjian: Shares of Fitbit may certainly seem as if they will make you a millionaire. They debuted on the market only in June via their initial public offering (IPO) and within a month surged more than 50% above their opening price. The company's narrative is compelling, too, as it sells wearable fitness technology to a market that is embracing fitness and wearable technology. Those inspiring numbers are only part of the story, however.
For starters, IPOs generally don't make the best investments in their first few years. Business professor Jay Ritter studied thousands of IPOs from 1970 to 2010 and found that, "IPOs have underperformed other firms of the same size (market cap) by an average of 3.3% per year during the five years after issuing, not including the first-day return" (as of December 31, 2011).
It's not crazy to buy shares of Fitbit. Unlike many young companies, it's actually profitable, with sales growing briskly, and it now has a lot of cash with which to further its growth. But it's already sporting a market value that tops $9 billion, and its price-to-earnings (P/E) ratio is rather lofty, near 100.
Instead of making you a millionaire, the shares may fall back to a more reasonable level, or they may grow some more. It's possible that the company will be bought out by a bigger enterprise interested in adding Fitbit's wearable health technology to its offerings. That would likely give the stock a pop in price, but after that, shareholders may just enjoy the slower growth of the acquirer. Another scenario is that Fitbit's offerings will be eclipsed by other companies' offerings, such as the Apple Watch or smartphones that track fitness activity. Think , after all, of Garmin's revolutionary GPS products, which are now suffering as more people use their smartphones for navigation.
Brian Feroldi: Biotech companyies with game-changing medications are certainly capable of producing extraordinary returns, and many millionaires have been made on the backs of industry giants like Gilead Sciences or Celgene. Some investors think that MannKind could be the next great biotech stock as the company recently launched Afrezza, an inhaled insulin used to treat diabetes. Afrezza offers many compelling advantages over traditional insulins that have to be injected, and the company may be able to use its proprietary technology to create other inhaled drugs as well. If the company can ramp up sales of Afrezza and successfully commercialize other drugs in the future, it certainly may have millionaire maker potential.
However, I think there are lots of reason to be cautious with MannKind's stock. During its first few weeks on the market, Afrezza only rang up a meager $1.1 million in sales. The company offered plenty of reasons why sales were so modest and is working actively to address them, but seeing sales volume so low was quite deflating to investors.
Pfizer attempted to launch an inhaled insulin called Exubera 9 years ago, which failed miserably, and sales for the drug were so disappointing that Pfizer pulled it from the market after less than a year. While I think Afrezza has several advantages over Exubera, it too could be a market dud if physicians and patients show that they just aren't ready for an inhaled insulin.
MannKind's stock has put investors on a roller-coaster ride for years, and has been a massive loser thus far, down more than 65% since coming public. While it's still possible for MannKind to become a huge winner, on a risk-adjusted basis I think there are plenty of better stocks to own with less risk and more upside. Investors could still win big with MannKind's stock, but I'd advise looking for better opportunities elsewhere.
Dan Caplinger: I have pets, so I understand the bullish argument for Blue Buffalo Pet Products. The newly public healthy pet-food specialist made its IPO debut in mid-July, offering shares at $20 and seeing them soar by more than 35% on their first day of trading. The company's supporters believe that by tapping into the premium pet-food market by building up its emphasis on natural ingredients, Blue Buffalo has found a potential gold mine of profits. Already, it nearly tripled its sales between 2011 and 2014 and almost quadrupled its net income over that period.
Nevertheless, the question for investors at this point is whether Blue Buffalo can justify its new price on the open market. A stock between $25 and $30 might not look expensive, but with earnings of just $0.52 per share in 2014, Blue Buffalo fetches an earnings multiple in excess of 50 based on recent share price.
If sales and profits continue to grow at their past pace, then Blue Buffalo could grow into a pricey multiple. Yet the company faces legal challenges concerning its advertising, and although it blames a supplier for having sent ingredients with byproducts that weren't indicated on its labels, Blue Buffalo still faces potential backlash if its customers don't remain loyal to the brand. That's a risk that Blue Buffalo investors should think twice about before taking.