Two summers ago, so roughly 18 months back, a good friend and relatively beginning investor asked for my advice in helping him build out his nascent portfolio. I didn’t have a ton of stock tips per se—more helpful investing pointers. But he did ask me what my single favorite stock was. I told him Grubhub stock.
At the time, Grubhub (GRUB) was on fire. It had shot up from a low of 18 in early 2016 to about 110-111 at the time of our conversation. My affection for GRUB wasn’t exactly an original opinion, at least among Cabot analysts; our Mike Cintolo had been touting the stock for years—it had made six appearances in the previous 18 months in his Cabot Top Ten Trader growth stock advisory. Mike also recommended Grubhub stock to his Cabot Growth Investor advisory, which is a bit more for long-term growth investors; it had more than doubled since he added it to the portfolio.
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Besides, there was a lot to like about the company—its earnings had nearly doubled in 2017, sales were expanding at a 35% to 45% clip, and its online food ordering and delivery model seemed both appealing and sustainable. So, I told my friend to buy GRUB stock.
The Grubhub Stock Fall
Here’s what’s happened in the ~18 months since:
Oops.
Things started out well, with GRUB soaring to new highs at 146 by September. But then the bottom fell out, and the stock didn’t stop falling until this November, when it touched 33. It’s now back up to 52, but the damage has been done.
My friend took my advice and bought Grubhub stock … and didn’t put in a stop-loss or set a loss limit. He eventually got out before it hit rock bottom a couple months ago, but not until after he’d lost more than 30% on it.
At Cabot, particularly in Mike’s two growth investing advisories mentioned above, we typically recommend loss limits in the 10% to 12% range, and no more than 15% to 20% at worst. By limiting losses, you can save yourself a lot of money. No matter how good a stock or a company looks, no stock is Teflon. Every single stock out there has the potential to suddenly go south.
And that brings me to the second stock I discussed with my friend 18 months ago: Tesla (TSLA).
The Tesla Stock Rise
This one, he brought up. Everyone has a strong opinion about Tesla. It’s the new Apple (AAPL). You either love it or hate it. My friend hated Elon Musk and was skeptical about the business model, an opinion informed by reading one too many hatchet jobs on Zerohedge.com. At the time, doubting Tesla was a popular opinion; the stock had fallen substantially from its mid-2017 highs, and Musk was taking a ton of heat after violating SEC rules by threatening to take the company private in an ill-fated tweet.
This time, I gave my friend some good advice. I told him that he should not only not doubt Tesla, but that now was the perfect time to buy Tesla stock, with the share price depressed and so many people doubting it.
Here’s what’s happened to TSLA stock in the 18 months since:
Admittedly, it took a while for TSLA to get going. For nearly the first year after I told my friend to snatch up Tesla stock while it was cheap, I looked foolish. But now it’s at all-time highs and is up more than 60% in the last 18 months.
So what’s my point in discussing the diverging tracks that Grubhub and Tesla have taken in the last 18 months? It’s not simply to point out that I’ve had some winning stocks and some losing stocks; that’s true of every investment analyst, including Cabot’s (though we tend to have way more winners than losers; it’s why we’ve stayed in business for half a century!).
No, it’s to say that narratives change on Wall Street, and it happens fast. Eighteen months ago, Tesla stock was a has-been with a CEO who was melting down in front of our eyes. Now TSLA is one of the hottest stocks on the market, and Elon Musk is being hailed as a visionary again.
Far more under the radar, Grubhub was a great growth stock with tons more upside potential 18 months ago. Now it’s down more than 50% even after a recent bounce, the company’s barely making money (though sales growth remains over 30%), and hardly anyone is talking about GRUB stock anymore.
These two outcomes may have been predictable (though I only got one of them right). But at Cabot, we try not predict; we just go with the evidence in front of us. So while I wasn’t wrong that GRUB was a good stock at the time, it became a sinking ship within months. Mike bailed on the stock (at a substantial profit) in both Cabot Growth Investor and Cabot Top Ten Trader long ago. If you bought Grubhub stock when it was near its September 2018 top, hopefully you set a strict stop-loss and limited the damage to your portfolio.
Long story short: when you invest, pay attention to what’s actually happening to stocks and the stock market as a whole. Don’t be a cheerleader for a stock you love no matter what happens to it. And don’t dismiss a good company just because it’s had a bad few months.
Be flexible. Recognize that Wall Street frequently changes its mind about a stock. And you should too.
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