Trendy Actions | Nasdaq
By Jared Dillian, Mauldin Economics
Peloton Interactive Inc. (PTON) was a stock market darling in 2020. Shares quadrupled as the company gave people a way to exercise and socialize at the same time during pandemic lockdowns. At its peak in January, Peloton’s valuation topped $ 45 billion, which seems more appropriate for a business in the midst of transformation than a maker of exercise bikes with an iPad stuck to it.
It turns out that the exercise bike business is a bit tough these days. Two Thursdays ago Peloton Interactive Inc. reported less-than-stellar earnings and the stock fell 30% in one day. Does this prove that it was all just a fad?
Consider that a hypothetical manufacturer of simple vanilla exercise bikes, without the computer stuck on, is a low-margin business. It probably has a valuation of around $ 1 billion and may not even be a public company. But once it comes down to technology, bringing together a community of people who exercise together, then it becomes something bigger in the public consciousness.
I have seen a number of ways of investing come and go over the years. Remember the post-September. 11 security titles craze led by Taser International Inc.? For a while, Taser was the hottest stock in the market. People were excited about the potential of a primarily non-lethal option in the law enforcement use of force continuum. But at the end of the day, this is just a manufacturing company – there’s nothing special about it – and the flower came out of the rose. Its stock collapsed in 2005, and it took a decade to recover and reach new highs. Today the company is known as Axon Enterprise, Inc. (AXON).
Another famous mode of investment was Crocs, Inc. (CROX). The unsightly rubber clog maker rose from around $ 11.50 a share in 2006 to $ 74.75 in late 2007 before cratering to around $ 1 in late 2008. Certainly, Crocs has made a comeback, with shares. hitting $ 180 this month, but that’s had to wait. 2020 to surpass its 2007 peaks.
One fad that takes place in real time is Beyond Meat, Inc. (BYND). Shares went from $ 25 in May 2019 to $ 234.90 in less than three months. People had high hopes for Beyond Meat when it went public. The company allows vegans and vegetarians to eat meat substitutes without compromising their principles, and offers an alternative to the emission-intensive livestock industry.
But health issues related to processed foods have taken over and the plant-based meat market is shrinking rapidly. People have now focused their attention on the next new thing, lab-grown meat. Beyond Meat recently reported dismal earnings, the stock has suffered a series of downgrades and the shorts are turning again.
Invest, then investigate
I spend a lot of time thinking about how to identify fads before they become mainstream. Being 47 years old and living in South Carolina, I’m usually the caboose on the information train. The key is to invest in something the first time you hear about it. The first time you heard someone mention “fidget spinner” you probably didn’t notice them. Or the second time. By the tenth time around, everyone was talking about fidget spinners, fashion was nearing its peak and the business had run its course. There is nothing inherently wrong with fashion investing, but these are not buy and hold investments.
Even if you knew perfectly well that Peloton was hot action, how on earth would you trade it if you found out in January? The idea of trying to short sell trendy stocks makes me a little sick. Even more difficult than trying to predict a trend is trying to predict the end of one. I guess if you sell CROX in 2007 and put it to sleep and don’t watch it, a year later you could close a winning trade. It’s never that easy. Investors made a lot more money in Peloton on the upside than on the downside.
What else out there is a fad? Are cryptocurrencies a fad? You might have been tempted to say this in 2016, but it seems less likely. Another home-based stock, Zoom (ZM), appears to have a viable business, although even Zoom is down more than 50% from highs. But it’s a much more worthwhile use of your time to choose longs, rather than shorts.
The best way to identify a fad before it happens is to open your eyes and ears. Talk to people. Which is new? What’s hot? Invest, then investigate.
Initially published by Mauldin Economics on November 18, 2021.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.