Bargain Time or Do They Deserve It?
In a year where all stock markets seem to be going up, it’s interesting to look into the stories of some of the companies whose stock suffered heavily in this period. Why didn’t they rise like the rest of the market? Did something bad happen to them? Is this a good bargain opportunity to get in cheap? Or is it fair for them to trade at cheaper valuations now? Check out these 3 big losers over the last few months:
ViacomCBS is one of the major media companies in the US, home of many TV channels you’re familiar with, like Nickelodeon, MTV and Comedy Central. On the 19th of February in 2020, before worries about the market set in, the stock was trading at about $35. It crashed quite heavily towards $10. Since then, the stock had risen astronomically to $100, that’s 10 times your money in a year. This sort of growth is quite strange for a company that’s considered to be mature and stable. So what’s going on? Did it really get 10 times better as a company?
As it turns out, there was a reason behind this. A hedge fund (a professional investment company), called Archegos, took a risky strategy of not only borrowing to invest but also investing using instruments where you can benefit if the stock goes up without having to put in the money at the beginning. In short, this lead to a position where even small swings in the stock price against them could result in huge losses. And this is what happened. They went bankrupt. Suddenly, the banks that were lending them money had to sell off the bunch of shares they got lumped with to try recover their debt, many of the shares happened to be of ViacomCBS. These massive sales at discount prices pushed the share price of ViacomCBS down by a lot. It now trades at $39. Also, some of the banks who got stuck with these stocks made large losses and also went down quite heavily, like Credit Suisse. Risk managers got fired, dividends got cut and so did banker bonuses.
This company, one of Richard Branson’s many ambitious projects, is a space related company, aiming to make tourism to space possible in the same way we catch a plane today. Over the past few months, the stock has suffered. The stock was as high as $60 in February and now trades at $23. What has happened to the stock? Could it now be cheap? Or is there a valid reason for this fall?
Two bits of news from the past few months stand out. First, chairman Chamath Palihapitiya sold over $200m worth of stock. Now, another key investor, Richard Branson, has also dumped $150m worth of stock. There are two reasons this may be bad for the stock.
First of all, given the median amount of Virgin Galactic shares traded on a given day, you would typically expect about $300m worth of shares to be bought and sold on a given day for this stock. If you add a $200m or $150m to be sold, then you’re left with a situation where way more stock needs to be sold than bought in a given period. More supply than demand means the stock falls.
Secondly, and this is both longer term and more dangerous, is what it signals. Key people like Chamath Palihapitiya and Richard Branson are insiders that know more about the company than we do. Them selling could signal that the stock could be overpriced, or they have reason to believe the company will not perform that well anymore. After all, if you thought the stock had a good chance of doing really well, you probably wouldn’t sell, and these two are most likely to know the true potential of the company.
Plug Power is a company that makes hydrogen fuel cells, a product to replace conventional batteries. If we’re going to move away from fossil fuels, batteries are very important for our transition as one of the key flaws in renewable energy is that it’s inconvenient to store. Therefore, it’s easy to see why there is hype around this stock. It rose very fast over 2020, from $3 to $67, a huge increase. But why has the stock fell back down to $26 over 2021?
A few things stand out. One was bad accounting. About a month back, the company announced that there had been some wrong accounting for previous financial statements and that they will re-state the financials for the previous years. This is perceived as a bad sign by investors, not only because past earnings might be less than was previously quoted, but who knows what other errors are out there. After all, as investors, we rely on what information the companies give us. If we can’t trust the numbers, can we trust any other numbers, can we trust the management?
Another issue is how a number of investment analysts that follow the stock downgraded their opinion on the stock from a buy to a hold. Many other investors follow the words of the analyst closely, so negative opinions of noteworthy analysts tend to drive the stock down. One of the primary reasons cited by these analysts is that, although hydrogen fuel cells have the potential to be a game chan
ger, it is yet to be proven which technology will win, and many competitors are flooding into the market. Plug Power traded at valuations that assume very high revenue growth rates in the future, which is now being thrown into question as it could be that competitors succeed instead.
So what do you think? Are investors being too pessimistic on these stocks and is it the time to grab a bargain? Or has it been fair for their stock to fall? See how good of an investor you are and take your position. When there’s volatility, that’s the time for you to really find great deals or horrible ones?
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