In Focus: 2020 Bargains or Busts?
We are not too far removed from the 2020 holiday season. That wonderful time of year kicked off by giving thanks for all that we have, and then 24 hours later we hustle, cuss, fight, kick, and push old ladies down to get a few new things. A few short weeks after the retail grudge match known as Black Friday, we get to open the new things we've acquired at that old lady's expense. Then New Year's Day rolls around, and we make resolutions for all the new things we want to acquire during the year.
In investing, new isn't always better. New is typically more talked about and more hyped by the media and professional investors, but it isn't always the better investment.
What a Difference a Year Can Make
In 2020 we posted the chart above in our weekly blog. The chart highlighted several 2019 IPOs and how they had feared in 2019 since going public. There was a lot of red in those charts. Many stocks just did not live up to the hype when they became public companies and their stock prices fell to bargain-basement prices.
I believed in early 2020 that investors would be better served shopping at the garage-sale of 2019 IPOs than worrying about what was coming down the pike in 2020. Although some phenomenal companies went public in 2020, I was right about the 2019 IPO busts. The chart below in blue highlights the same companies as the grey chart does, but in one year there is a lot more green. Once again bargain hunting and patience paid off for investors.
It would be selfish of me to not give credit where credit is due. In Jon D. Markman's great book, 'The New Day Trader Advantage', he discusses a strategy where he waits for IPOs and stocks that have been spun off to decline, and then he buys them on the cheap when many market participants aren't paying attention. It's a strategy that I've found works well for value investors as well as traders.
Uber closed 2019 valued at ~$37 billion. You didn't have to be Warren Buffett to think that $37 billion is a little low for a global taxi company. Almost anywhere in the world you go, you can hail an Uber, that has to be worth a little more than $37 billion, right?
Bargains or Busts of 2020
So in 2021 I've been scouring the markets for the forgotten, the stocks that are going for bargain basement prices, the companies that have something to prove, and unfortunately I haven't found many.
One reason I haven't found many bargains is because I wasn't focused much on IPOs in 2020 because of what I mentioned earlier, that I had a strong belief that there was lots of value in the 2019 IPOs. Also, the pandemic made me think that the IPO market was dead in 2020. There was also the rise of SPACs, which took a lot of attention away from the traditional IPO.
But there were a few dogs of 2020. The all knowing internet has deemed four particular 2020 IPOs under performers. Casper (CSPR) which fell 57% in the timeframe from its market open to the end of 2020, GoHealth (GOCO) which closed down 45% from its market open to the end of 2020, Root Inc (ROOT), which closed 2020 down 42% from its market open, and McAfee (MCFE), which closed 2020 down 10% from its initial market open.
Of the four dogs of 2020, I'm keen on two, Casper and Root Inc.
Casper went into 2020 with high hopes, but investors weren't expecting much. The company's S-1 revealed that Casper is a marketing company more than it is a mattress company. From 2017 to 2019 Casper's marketing spend as a percentage of revenue was 42%, 35%, and 35% respectively. Over the same time frame, Temper Sealy's (TPX) marketing spend as a percentage of revenue was 22%, 22%, and 21% respectively.
The advertising did pay off for Casper though. During the pandemic the company reported an increase in website visits, but the pandemic severely disrupted their supply chain, making it difficult for the company to fill potential orders. Casper believes its supply-chain issues are fixed, but it feels to me like the company is starting over, which should include more big marketing and advertising spending to get people back to checking out their offerings.
Also, something else I took away from Casper's Q3 earnings call is that they will slow the roll out of the physical stores they had planned to open pre-pandemic. Personally, I think the company would benefit from a small number of showrooms and little to no new big brick-and-mortar retail stores, and I think the company feels this way as well.
Root Inc, is another company trying to disrupt the insurance industry. You may have heard about Lemonade (LMND), the other company attempting to disrupt the insurance industry. Lemonade is up 195% from where it opened trading back in July of 2020.
From my decade of insurance experience I found Lemonade to be the more polished version of the two. But the insurance industry is in desperate need of disruption and any company that can do it even half way will be a big winner.
My third company that I see value in is Lordstown Motors (RIDE). This company went public by way of a SPAC in October of 2020. The stock hasn't done much since it's become Lordstown Motors and that's likely because the company is still a significant amount of time away from producing its first vehicle. Currently it's estimated that production of the company's Endurance electric truck will start in September 2021.
The reason I'm drawn to Lordstown Motors is because the company is zigging when many EVs are zagging. From the start the company's CEO Steve Burns has stated Lordstown isn't making a competitor to Tesla's (TSLA) Cybertruck or Nikola's (NKLA) Badger. Lordstown is attempting to help companies with a fleet of pickup trucks go electric and save money. Lordstown is making the working man and woman's pickup truck. When the average investor realizes how big this market is, the stock will have likely quadrupled.
If you're not looking to get rich tomorrow then Casper, Root, and Lordstown are definitely worth checking out. These are companies that are seen by Wall Street as down and out, but that's the time when good companies and good people make improvements and fix what ails them.
I've said it in the past, trying to time the market is a fool's game. Very few people can time the markets successfully, and sadly I am not one of those few. I've learned to be comfortable with buying cheap and holding until my number comes in.