Why Every Investor Needs to Own the Most Dangerous Stock on Wall Street At Least Once
My editor couldn’t believe it…
“But Keith, you consider it one of the most dangerous stocks on Wall Street!”
“Not one of…” I replied. “The most dangerous stock on Wall Street.”
And every investor needs to own it at least once in their investing lifetime.
The reason why may surprise you.
The True Value of a Meltdown
I know, I know.
I can hear the wheels spinning right through the Internet!
…I need to own Sears Holding Corp. (NasdaqGS:SHLD) like I need another hole in my head!
The retailer has lost a staggering $152 per share and 93% of its value since peaking in 2006 at $158/share. It’s dropped 83% in just the last two years alone.
Calling the company a bug in search of a windshield is an understatement.
Yet, Sears can teach every investor a surprising lesson when it comes to bigger profits.
Let me explain.
Sears is a retailer trapped by three things: its own legacy, chronic underperformance in the face of Amazon.com Inc. (NasdaqGS:AMZN), and executives who are systematically stripping it of anything remotely resembling value.
The store has tried and failed to be everything to everybody without realizing shoppers marginalized it years ago. E-commerce is killing it and my back of the envelope calculations tell me the company needs between $1.5 and $2.0 billion dollars in funding just to service the staggering debt load it carries this year alone.
Put succinctly, it’s a company that’s long on hope and not much else.
That’s why I singled out the once-proud retailer in January 2015 as one of the five most dangerous stocks on Wall Street, and have again several times since. Anybody following along has had the opportunity to bank at least 83%, or avoid losses of the same magnitude.
Some have ridden it all the way down from $32 a share to $6.10 where it’s trading today, all the while suffering a catastrophic loss. “It’ll be back,” goes the rally cry.
Others are diving in because it’s “a turnaround play” or “ripe for a rebound.” Good luck. People said the same thing about Eastern Airlines, People Express, Kodak, and Palm. They’re all gone.
So why on earth would I say every investor needs Sears?
Because the true “value” of owning it (or any stock like it) is what you learn from the experience.
Successful Investing is About Being Profitable, not Right
The critical lesson is that there comes a point at which you’ve got to stop viewing Sears – or any stock like it – for what it’s been and view your money for what it could be.
There are a lot of ways to do this, but the ultimate litmus test is very simple: ask yourself if you want to own a stinker to prove that you’re “right” about its potential, or because you want to be profitable for having taken the plunge.
That sounds obvious, but you’d be surprised how many investors can’t sort out the difference.
There was a time when I couldn’t either.
In the 1980s I owned stock in a small educational software provider named Worlds of Wonder that I was convinced would change the world. Only the world didn’t think so.
I didn’t quite ride the company into the ground like a lot of people are doing with Sears today, but I did take a 50% buzz cut before I came to my senses.
Then, I learned from the experience.
It wasn’t easy.
Deciding to take a loss never is, even though sometimes that’s exactly what’s needed.
I had to ask myself the very same question I’ve just shared with you and brace myself for what I “knew” would be the answer when I looked in the mirror – that there was simply no way to justify holding the company’s stock when there were far better alternatives available that were growing faster and more profitably.
So I took a deep breath.
And moved on to Microsoft Inc. (NasdaqGS:MSFT), a far stronger company driven by Unstoppable Trends that more than made up for my losses even as Worlds of Wonder lurched unceremoniously into bankruptcy.
The Best Company to Make Up Lost Ground (and Profits)
Today I’d move on to Amazon.com Inc. (NasdaqGS:AMZN)
Sears executives claim they’re closing another 200 stores since 2015 to weed out the underperformers while also selling off valuable brands like the Craftsman tool line to help turn things around. The company has closed more than 2,000 stores since 2011, or a decline of 60% in their retail footprint.
The fact that there are still more “underperformers” at this point stretches credibility and tells me the chain has far deeper and more serious problems that closures cannot fix. Chief among which is they can’t attract even a few thousand paying customers a day.
Amazon, on the other hand, is company that’s changed the face of retailing.
It’s Team Bezos versus everybody else. Any retailer without an “Amazon strategy” is on borrowed time.
The Seattle-based behemoth is growing earnings at 55.4% a year and handled a staggering 101.6 million more online visits from holiday shoppers this year than last. There are now 40 million Prime members in the U.S. alone who are paying $99 a year for the privilege of getting better, faster service and cheaper prices.
Amazon’s cloud services now handle an almost surreal 45-60% of all data traffic through infrastructure as service providers – “IaaS” for short. That’s more bits and bytes than the next three players combined – Microsoft Inc. (NasdaqGS:MSFT), Alphabet Inc. (NasdaqGS:GOOG), and International Business Machines Corp. (NYSE:IBM) – according to a 2016 Synergy Research report.
The choice is pretty clear.
You can place your bets with a dying retailer or hitch your wagon to a player driven by billions.
Kicking yourself in the rear is optional.
Until next time,