3D printing stocks started to get hot in 2010. 3D Systems was under $4 a share in January of that year. By Christmas, it was $10.50. Two years later, it was hitting $40. It finally peaked at the end of 2013, up around $100.
Now, 3D printing had everything you want in a great investment story. It was very cool tech. It would cut out the middleman — one day soon people would be able to print everything from car parts to guns in their homes. Huge 3D printers could build affordable modular homes. One company, Organovo, was even printing blood vessels…
Imagine if you could just print that kidney you need. Sure, installation would still be an issue, but the fear of waking up in hotel bathtub full of ice would be a thing of the past!
Today, 3D Systems is a $15 stock. It’s been stuck between $10 and $20 for three years. Meanwhile, 3D printing itself is alive and well. Nearly $2 billion worth of dental implants and such will be printed this year, hitting $5 billion in the next five years. The Air Force is printing its own F-35 parts. Kids are printing penguins and Pokémon in public libraries. I’m sure within the next few years, I’ll be able to buy a license and download software from Nike to print my own shoes…
My point here is not to make a case for owning 3D Systems’ stock. I’m more concerned with how a stock like 3D Systems becomes such a broken stock.
Since 2010, 3D Systems’ revenue has steadily risen over 400%. And the company was turning a pretty good profit during that huge run for the stock, peaking around $0.45 a share in 2013. So what happened?
The Growth Problem
You can take a quick look at a 3D Systems chart and conclude that the 2010–2014 run got a little ahead of itself…
The price-to-earnings (P/E) ratio went from 77 to nearly 200 in 2013 alone. Investors were clearly paying a lot for growth. (Think of a P/E ratio as the number of years it would take to pay for the company out of profits. A P/E of 10 means it would take 10 years of profits to pay for the company outright.)
Now, a P/E of 200 sounds stupid. But what if you’ve just gone from a -$0.10 a share loss to a $0.01 profit? And what if that profit will be $0.10 in a year, and $0.15 in two years?
P/E ratios aren’t always the best measures for growth stocks, and paying up for growth is not necessarily a bad thing.
But that growth rate better not change…
In the case of 3D Systems, the growth outlook changed on February 5, 2014. That’s the day the company sent out a press release for its preliminary outlook for 2014:
The company expects its non-GAAP earnings per share to be in the range of $0.83 to $0.87, below its previously expected guidance of $0.93 to $1.03 and its GAAP earnings per share to be in the range of $0.43 to $0.45.
That was all it took…
By mid-2016, that $0.45 a share profit was a -$5.85 a share loss. Ouch.
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Chipotle, Papa John’s, and ???
Growth stories fail all the time. Those foodborne illness problems at Chipotle (NYSE: CMG) ended a fantastic growth run. Chipotle had run up to $700 a share when a few people started getting sick. No one died. And the outbreaks were clearly local events.
Didn’t matter. It was enough to change the growth story, and the shares got cut in half over the next year.
At $448 a share, Chipotle still trades with a forward P/E of 38. Analysts still see 36% earnings growth for fiscal 2019. We’ll see. I’m skeptical. I wouldn’t buy Chipotle at current prices. $350? Maybe. $450? Not a chance.
And I am just as skeptical that Chipotle will ever see $700 again. At least not in the next five years. The growth story is broken, and it’s a broken stock.
Same with Papa John’s (NASDAQ: PZZA). It’s a broken stock. Analysts have lowered their 2018 estimates about 10%, from $2.52 to $2.30 a share. That is not enough.
GE was a $28 stock a year ago. It’s $13 now, and the only hope right now is that the earnings decline has stopped. It’s gonna be a while before there’s any hope that actual growth can return.
Just a couple weeks ago, Netflix was $425, and analysts were falling all over themselves to give it higher price targets: $500… $550…
Today, it’s $350. U.S. subscriber growth has stalled. And content costs for the year will be much more than originally estimated. International growth is what’s driving the stock.
I don’t know that Netflix’s growth story has changed. But I’d be on the lookout if I owned it. Amazon is ever-present, and more competition is coming from Disney and maybe even Walmart.
Will any of that kill Netflix? No, of course not. But the forward P/E for Netflix is 81. If any bumps show up, this stock can lose $100 before you can say “slowing international subscriber growth.”
Tesla (NASDAQ: TSLA) might be the prime target for slowing growth numbers. A slew of electric cars comes out fairly soon. Production rates and deliveries already seem to be a bit mushy; real competition in the higher-end market could crush those metrics.
Here’s the takeaway: When you own a growth stock, it doesn’t matter what the company does. The market for pizzas, 3D printers, or electric cars can be as robust as ever. But if the company isn’t selling more and making more, it simply doesn’t matter.
It’s always easy to explain away a hiccup in growth. It’s also usually the wrong thing to do. Selling a growth stock at the first sign of growth problems is usually the way to go.
How to Buy Growth
Now, every one of the stocks I’ve mentioned has made investors a lot of money as it ran higher. The key is always to buy the stock before the growth story matures. This is actually easier to do than many investors think. Right now, one of the best emerging growth stories is legal cannabis…
I know, you’ve probably heard this before. But do you think the legal cannabis trend is done? Umm, no. No, it’s not. Marijuana is not even legal according to federal law yet!
From a stock market perspective, this sector will literally go from $0 to $50 billion in the next couple of years.
There’s one U.S.-based investment that’s already making money on the future of legal cannabis, and it pays a great dividend. And this stock is primed to hit hyper-drive when legal cannabis becomes a “thing.”
Don’t forget: When Chipotle first broke $100 in 2010, a lot of investors said, “Yeah, burritos, so what?”
Two years later, when the stock was breaking over $400, they said, “Huh, whaddya know, guess I should’ve bought it.”
The time is now. Here’s what you need to know.
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
