Intelligent Investor gets a lot of queries about this stock or that. Generally they run along the lines of ‘Stock X is doing well. What do you think?’
Even if I’ve never heard of the company, most of the time I know what the share price chart looks like before I even view it. The stock will have at least doubled over a short period.
Indeed, the questions become more frequent as the share price rises. Perhaps that’s why the number of queries about Blackmores (ASX: BKL), Bellamy’s (ASX: BAL) and a2 Milk (ASX: A2M) have increased sharply in recent months.
Blackmores is up five-fold this year, while Bellamy’s is up seven-fold. A2 Milk has merely doubled.
The common theme is that these stocks are popular. They’re being talked about. And they’re in the headlines.
Of course, they have an attractive ‘story’ behind them too. For Blackmores, Bellamy’s and a2, it’s that there’s huge demand for quality, ‘brand Australia’ products from China. There are reports of Chinese people buying up these companies’ products in Australia, then selling them for profit back home.
I’ve already talked about the havoc this behaviour can play with a company’s supply chain – see Bellamy’s Organic: When not enough is too much from 9 Nov 15. These problems only become obvious much later when, after the companies have scaled up, the mania that drove the demand disappears.
Intelligent Investor’s response is always the same with hyped-up stocks. We steer clear of difficult-to-value companies that trade on super-premium prices.
Often the stocks will continue to rise in the short term after we’ve said ‘no thanks’. Bellamy’s has risen 26% in the few weeks since that last blog post, while Blackmores is up a whopping 80% since we issued a caution a few months back.
If you’re looking for Intelligent Investor to pick short-term winners, you’ve come to the wrong place.
However, what we are good at is telling you what to avoid longer term. They’re usually exactly the same companies attracting the greatest interest in the short term.
But enough of the abstract. Let’s jump into the Tardis and head back to 2011. The relevant company here is Mesoblast (ASX: MSB), one of that year’s market darlings. Chart 1 tells the story of the share price in 2011 (and beyond).
We received numerous queries about Mesoblast in 2011. The soaring share price appears to have been the source of the interest.
Here’s one of the queries, including my response. In summary, I said ‘we missed Mesoblast at $4,00, we’re missing it again at $8.00 [about where the stock was at the time] and we might miss it at $12.00’.
Mesoblast never did hit $12.00. Today Mesoblast closed at $1.76, having collapsed 50% in the past month alone.
The moral of the story is simple. Today’s headlines might be exciting but they mean nothing. Instead what matters are the headlines five years down the track.
For Mesoblast, those headlines are now resolutely negative, and anyone who bought the stock in 2011 has lost 75% of their capital. An attractive story and an attractive stock are two completely different things.
We don’t know whether today’s hot stocks – Bellamy’s, Blackmores and a2, among many others – will meet the same fate as Mesoblast. What we do know is that the odds are against them.
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Disclosure: The author has never owned shares in any of these stocks.