The most scintillating investment idea can cut two ways. First, there are ideas that have strong and sustainable business models. These companies usually fill a need in society. They solve a problem.Then there are ideas which sound fantastic on the surface, but after probing into the concept, one realizes that it has all the makings of being another Hula-Hoop.
There's nothing wrong with investing in a fad, provided you get in early. But at some point, however, the music is going to stop and the company may collapse because it's a one-trick pony.
Before getting to the next fad candidate to hit the skids, let's take a brief look back at some recent one-trick ponies.
1. Heely's (HLYS, Financial) makes shoes with detachable wheels on the heels, presumably so kids could glide down the hallway of their local school. This is a classic example of a fad. At one time, you might have seen kids wearing these shoes everywhere. Now, not so much. The chart below shows what happened with this fad.
.jpg)
Note carefully the days when the stock drops precipitously. There are several of them, and that's usually due to an earnings miss. The company trades at a price equal to its cash position, which means the market thinks the company and product itself is worth nothing. Some may see this as a value, which it would be if the company reinvents itself. As of the moment, I see no such thing happening.
2. The next stop is Crocs (CROX, Financial). If you're sensing a pattern, it's with good reason. Shoes and clothing in general are ripe for fads. Crocs shoes aren't all-weather wear like Timberland's (TBL, Financial) shoes. They're for warm weather, they aren't particularly comfortable, and they are not what you'd call a product with long-term viability. Look at its chart.
.jpg)
Again, we see huge selloffs. If you look back, you'll see Crocs made massive write-downs of inventory, had revenue plunges of more than -30% and really struggled through the bad economy. The stock has recovered quite a bit from the lows, and it is projected earn money this year and next. But it's not through innovation. Any recovery is going to be short-lived.
3. Finally, we have Jones Soda Co. (JSDA, Financial). Once again, we have bubbly colored water presented as some sort of grand innovation for the beverage market. It wasn't. Soda never is. Soda is entirely about marketing. Jones had some good marketing for a while, but it takes a true marketing phenomenon to keep pace with Coca-Cola (KO, Financial) and Pepsi (PEP, Financial). Jones doesn't have the money for that. Jones Soda is a fad.
.jpg)
The next 'fad' stock to collapse
I think Build-A-Bear Workshop Inc. (BBW, Financial) is the next one to fall. Actually, it already has to a great extent.
The company's concept is really is a sweet idea and if you've been to a store, you'll see how wonderfully friendly the staff is and how much kids love the place. So it pains me to say that stuffed animals are just stuffed animals. There's nothing special about them. The difference between bears and, say, the American Girl line is the latter is marketed as being a reflection of the buyer. There are services that treat the doll as a miniature version of your little girl, so your kid can identify with it directly.
.jpg)
It may not sound like much a difference, but it's why American Girl remains a massive hit and Build-A-Bear is just getting killed, particularly in this economy. The company just reported earnings and missed estimates by $0.21 -- made all the worse because analysts forecast a -$0.24 loss. Revenues were down -11% and same-store sales down -10% as well.
Action to Take --> Build-A-Bear must change its business model if it hopes to survive. Right now, I see it as just a fad.
Investors should short Build-A-Bear. This is a gutsy call given that the company has $31 million in cash on hand and no debt. However, cash on hand is half of what it was last year and I doubt cash flow will be positive this quarter. I see this company going into bankruptcy at some point, barring a brilliant innovation or turnaround.
-- Frederick M. Steier
Frederick M. Steier has a background in finance, as well as fundamental stock and broader market analysis. His approach to investing consists of finding overlooked and undervalued companies with solid management, strong free cash flow, manageable debt and earnings growth. He uses common quantitative and qualitative tools to determine if a stock should be bought or sold. Read more...
There's nothing wrong with investing in a fad, provided you get in early. But at some point, however, the music is going to stop and the company may collapse because it's a one-trick pony.
Before getting to the next fad candidate to hit the skids, let's take a brief look back at some recent one-trick ponies.
1. Heely's (HLYS, Financial) makes shoes with detachable wheels on the heels, presumably so kids could glide down the hallway of their local school. This is a classic example of a fad. At one time, you might have seen kids wearing these shoes everywhere. Now, not so much. The chart below shows what happened with this fad.
Note carefully the days when the stock drops precipitously. There are several of them, and that's usually due to an earnings miss. The company trades at a price equal to its cash position, which means the market thinks the company and product itself is worth nothing. Some may see this as a value, which it would be if the company reinvents itself. As of the moment, I see no such thing happening.
2. The next stop is Crocs (CROX, Financial). If you're sensing a pattern, it's with good reason. Shoes and clothing in general are ripe for fads. Crocs shoes aren't all-weather wear like Timberland's (TBL, Financial) shoes. They're for warm weather, they aren't particularly comfortable, and they are not what you'd call a product with long-term viability. Look at its chart.
Again, we see huge selloffs. If you look back, you'll see Crocs made massive write-downs of inventory, had revenue plunges of more than -30% and really struggled through the bad economy. The stock has recovered quite a bit from the lows, and it is projected earn money this year and next. But it's not through innovation. Any recovery is going to be short-lived.
3. Finally, we have Jones Soda Co. (JSDA, Financial). Once again, we have bubbly colored water presented as some sort of grand innovation for the beverage market. It wasn't. Soda never is. Soda is entirely about marketing. Jones had some good marketing for a while, but it takes a true marketing phenomenon to keep pace with Coca-Cola (KO, Financial) and Pepsi (PEP, Financial). Jones doesn't have the money for that. Jones Soda is a fad.
The next 'fad' stock to collapse
I think Build-A-Bear Workshop Inc. (BBW, Financial) is the next one to fall. Actually, it already has to a great extent.
The company's concept is really is a sweet idea and if you've been to a store, you'll see how wonderfully friendly the staff is and how much kids love the place. So it pains me to say that stuffed animals are just stuffed animals. There's nothing special about them. The difference between bears and, say, the American Girl line is the latter is marketed as being a reflection of the buyer. There are services that treat the doll as a miniature version of your little girl, so your kid can identify with it directly.
It may not sound like much a difference, but it's why American Girl remains a massive hit and Build-A-Bear is just getting killed, particularly in this economy. The company just reported earnings and missed estimates by $0.21 -- made all the worse because analysts forecast a -$0.24 loss. Revenues were down -11% and same-store sales down -10% as well.
Action to Take --> Build-A-Bear must change its business model if it hopes to survive. Right now, I see it as just a fad.
Investors should short Build-A-Bear. This is a gutsy call given that the company has $31 million in cash on hand and no debt. However, cash on hand is half of what it was last year and I doubt cash flow will be positive this quarter. I see this company going into bankruptcy at some point, barring a brilliant innovation or turnaround.
-- Frederick M. Steier
Frederick M. Steier has a background in finance, as well as fundamental stock and broader market analysis. His approach to investing consists of finding overlooked and undervalued companies with solid management, strong free cash flow, manageable debt and earnings growth. He uses common quantitative and qualitative tools to determine if a stock should be bought or sold. Read more...
Disclosure: Neither Frederick Steier nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
This article originally appeared on StreetAuthority
This article originally appeared on StreetAuthority
