John Dorfman: Peloton leads market’s parade of losers
Part of Peloton Interactive Inc.’s stock decline this year was funny. But the loss of 73% for the year to date (through Dec. 21) was not so humorous.
As shown in the accompanying table, Peloton suffered the biggest loss of all stocks with a market value of $5 billion or more.
Peloton
In the TV show “And Just Like That,” a character known as Mr. Big suffered a fatal heart attack after riding one of Peloton’s deluxe exercise bikes. Peloton stock quickly dropped more than 14%.
The company — wisely, in my opinion — put out a press release pointing out that the fictional Mr. Big “lived what many would call an extravagant lifestyle, including cocktails, cigars and big steaks.” Riding the bike, the company said, “may have even helped delay his cardiac event.”
About a year ago, when Peloton was one of the best-performing stocks around, I wrote, “I might buy the bike. I would not buy the stock.”
I pointed out that Peloton had yet to show a full year of profits — which is still true. The company posted a couple of quarterly profits, but red ink is flowing again.
Peloton has cut prices on its bikes but still had about 100 days of inventory on hand as of Sept. 30. I don’t expect the stock to plunge, but I don’t think it will outperform the market either.
Altice USA
Altice USA is a broadband provider in rural areas (Suddenlink) and the New York City metropolitan area (Cablevision). Its biggest problem is cord cutting, in which people drop their cable service to get their news and entertainment via the Internet.
I have concerns about the company’s debt level. Its balance sheet is poor. Nonetheless, I think this stock will outperform the market in the next 12 months. It sells for only seven times earnings, and the covid-19 pandemic, unfortunately, looks likely to keep people indoors a lot. They might as well watch TV.
Zillow Group
After years of providing home-value estimates online, Zillow got into the business of buying and selling (flipping) homes and flopped monumentally. Now, it’s going back to its bread and butter.
I think the company can recover from its misstep, but unfortunately, the basic business rarely was profitable. Zillow posted losses in eight of the past 10 years. I enjoy the website but would avoid the stock.
Coupa Software
Coupa Software Inc., based in San Mateo, Calif., sells cloud-based software to help companies with invoice processing, procurement and expense management. It’s a good niche, but crowded. In the past five years, Coupa has grown its sales at a 24% annual clip. Unfortunately, it has yet to show a profit.
In 2020, profitless stocks often did great. I don’t think 2022 will be as kind to them. And Coupa shares are expensive at 15 times per-share revenue.
Ring Central
I might not be objective about Ring Central Inc. (see the disclosure at the end of this column), but I believe it’s an ongoing train wreck.
The company, based in Belmont, Calif., offers a cloud-based communication system that includes phone service, email and videoconferencing. It competes against phone companies, Zoom Video Communications Inc. (ZM) and Cisco Systems Inc. (CSCO), among others.
Since 2019, it has owned the naming rights to the Oakland Coliseum, now the Ring Central Coliseum.
Ring Central has been growing fast (27% average annual revenue growth in the past decade) but has posted a loss in each of the past 11 years. It came close to breaking even in 2017, but losses have widened since then.
The record
Each December, beginning in 2011, I’ve recommended from one to three of the year’s biggest losers as stocks to buy. The average 12-month total return on these recommendations has been 36.1%, compared with 17.8% for the Standard & Poor’s 500 Total Return Index.
My picks have beaten the index only four times out of 10. But the average return is high because the yearly figure exceeded 100% four times.
Last year was one of those successes. I recommended Marathon Oil Corp. (MRO) and Continental Resources Inc. (CLR), which returned 134.6% and 161.6%, respectively, for an average of 148.1%. The S&P 500 returned 26.8%, including dividends.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Disclosure: A hedge fund I manage has a short position in Ring Central. It owns call options on Cisco and Continental Resources.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached via email.
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