Summary
- A FTC complaint was recently filed against Lifelock
- There's an outstanding lawsuit by a former whistleblower executive
- Stay away from LifelockÂ
Lifelock (NYSE:LOCK), an identity theft protection company, fell ~50% (from ~$16 to ~$8 per share) these last few days. That made me curious. Sometimes the market overreacts and there's a bargain to be found. Before researching, I knew next to nothing about the company except they have some brand recognition from seeing a couple of their commercials. I also know identity theft is a problem and likely to get worse as we rely more on smartphones for commerce.
I found out very quickly why Lifelock fell and why it deserves to fall. The Federal Trade Commission issued a press release today titled, "FTC Takes Action Against LifeLock for Alleged Violations of 2010 Order". The subtitle explains, "FTC Asserts LifeLock Failed to Institute Security Program And Misled Consumers About Its Identity Protection Services". Here's the most disturbing quote from the press release:
"From at least October 2012 through March 2014, LifeLock violated the 2010 Order by: 1) failing to establish and maintain a comprehensive information security program to protect its users' sensitive personal data, including credit card, social security, and bank account numbers; 2) falsely advertising that it protected consumers' sensitive data with the same high-level safeguards as financial institutions; and 3) failing to meet the 2010 order's recordkeeping requirements."
I was still curious because companies frequently get a slap on the wrist and then business as usual. If the company is well run, has a competitive advantage, and has solid fundamentals, then there still might be an opportunity. I looked at the company's financials and its ratios on GuruFocus.
Revenue growth over 5 years looked good so then I looked at net income history.
Net income was less impressive so I dug further.
My next step was to go to search for previous articles about Lifelock.There happened to be an article on Lifelock from last year and it gave me enough information to make a decision. Basically, the author thinks Lifelock is a scam. A quick summary of his findings:
- Author went to a Lifelock investor presentation
- After the presentation, he couldn't figure out what value Lifelock provided to customers.
- For every question he asked various executives, he got the response, "Ask the CEO"
- There's another lawsuit between a former executive, Michael Peters, and the company. Long story short, Peters was hired and was mortified at Lifelock's operating practices. He met with top management to describe his findings and was fired because they didn't like what he had to say. The worst of Peters' charges is that Lifelock discriminated against elderly customers by downgrading their support so their help desk could reduce call volume and labor.
At this point, you can understand why I chose to ditch Lifelock. I don't short stocks . Therefore, there's not much chance that Lifelock will be a good investment opportunity. Let's recount the red flags:
- FTC complaint
- Net income severely declined last year
- 3rd party author's article reinforced the FTC complaint
- Another outstanding lawsuit reinforcing general theme of a management with low integrity
Final Thoughts
- Large price declines are a potential opportunity to find mispriced stocks
- My goal is to eliminate a stock as soon as possible so I don't waste time researching dead weight. At the same time, I'm a big believer that your findings might not be beneficial instantly but could down the line. It's possible one of Lifelock's competitors may show up on my radar in the future
- I was willing to look past the FTC complaint and do further research because it was possible that the company might get a light fine and then the stock might recover
- I stopped when I had 4 red flags
- Had the stock had less red flags, my next steps would have been to review the earnings transcripts then the most recent SEC filings, i.e. the 10Q or the 10K
- What are your research steps? When do you deem a stock unworthy and move on to the the next? Let me know in the comments below.
