Former High-Flyer Fitbit Represents Buying Ugly at Its Finest

 | May 01, 2017 | 11:00 AM EDT
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Historically, I've avoided buying fad stocks, primarily because they rarely conform to any of my value biases, as limiting as those may be to many investors. Fad stocks typically trade at high multiples (of everything), and are driven by investor frenzy and momentum, and not fundamentals. Admittedly, plenty of investors have made a great deal of money in these situations despite my reservations, but plenty have taken their lumps as well. It's difficult enough to accurately determine what is and isn't a fad, not to mention to accurately call when the luster will wear off and valuations come back to reality.

However, I sometimes have become interested in former fad stocks once the dust settles and the momentum crowd has moved on. Such is the case with Fitbit (FIT) , a former high-flyer that has fallen back to earth. Perhaps that's being generous; shares are down nearly 90% from the stock's all-time high, 70% over the past year and 28% year to date. Fitbit has been putting up worse-than-expected quarterly results, and revenue and earnings expectations have ratcheted down considerably along with management guidance.

Adding insult to injury last week was a report from ABC News about a woman claiming that her Fitbit bracelet exploded and melted while she was wearing it. FitBit denied in a statement that the device malfunctioned, saying that a third-party analysis showed that "external forces caused the damage to the device." Still, when it rains it pours, and many investors have given up on the name.

Not surprisingly, I see things a bit differently. I may never be one to purchase and wear a Fitbit, but I know plenty who do. I see a company that the markets have all but given up on and about which it has little in the way of expectations. I see a highly liquid company that ended its latest quarter with $706 million, or $3.15 per share, in cash and no debt that currently trades for just over 2x net current asset value and 1.4x tangible book value per share. I see a company that needs to get its act together, but has a fairly long runway to do so. At this point, FIT needs a win, some relatively positive news to put some wind back in the sails, whether that's new products, some better-than-expected results or a combination of the two. That may be a tall order.

Make no mistake. There is still a great deal of risk here. A stock that was $8 at the beginning of the year now changes hands for less than $6. Consensus estimates are calling for narrowing losses through 2019. This is not the type of name that you enter without recognizing the risks, or if you believe in the story, one that you'd want to take a position in all at once. When the going gets rough, a $6 stock easily can become a $4 stock.

This is buying ugly at its finest.

(This column has been updated to add FitBit's response.)

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