2022 is off with a bang, and not the good kind. Three weeks into trading, the S&P 500 is off about 7.7% while the Russell 2000 Index (down 11.4%), and Russell Microcap Index (down 11.7%) have been hit even harder. Growth is taking the brunt of the damage as evidenced by the slides in the Russell 2000 Growth Index (down 15.9%), and Russell Microcap Growth Index (down 16.9%). That's a year of losses concentrated into a mere three weeks.
It's good to have some dry powder here despite non-existent cash yields as some bargains ultimately may present themselves. Besides busted initial public offerings (IPOs) that might have been overly punished after the growth crowd has moved on, I am looking for those fall-off-a-cliff situations.
I'm surprised (but should not be) to see what has happened to Peloton Interactive (PTON) , which is down 83% over the past year and 24% year to date. This was a $166 stock last January but closed last Friday at just over $27. There could not have been a bigger buzz about Peloton, with seemingly everyone and their brother buying one of its bikes during the pandemic and signing up for its subscription service to boot. The most visible issue is that growth has slowed and the company reportedly has halted production due to soft demand. The bigger, perhaps less discussed issue is that Peloton is not profitable and is not expected to be at least through fiscal 2024 (June).
In addition, Peloton's balance sheet is not good enough to overlook the falling demand and profit picture. Peloton ended its latest quarter with $924 million, or about $3 per share, in cash and short-term investments and $838 million in debt. The company is expected to lose about $300 million next year based on consensus earnings estimates.
It isn't that there's no potential meat on the bone for Peloton at this point. Last week activist investor Blackwells Capital, which has a stake of less than 5% in the company, called for Peloton to put itself up for sale, so things may heat up a bit from here. In addition, Stifel upgraded shares from "hold" to "buy" with a $40 price target, while Needham now has a $50 price target.
There's just not a big enough margin of safety for me at this point. A better balance sheet and prospects for nearer-term profitability might capture my interest.
Peloton's situation reminds me of the Fitbit saga. That company looked like it was ripe for a takeover; while demand had fallen, the balance sheet was strong with loads of cash. In addition, Fitbit had a solid brand name. In the end, the deal got done, but not at a great price, and Alphabet (GOOGL) walked away with the company for $2.1 billion, or $7.35 a share. At the end of the day I did OK on the Fitbit trade (my average cost basis was $4.50 a share), but only because I continued to buy shares as they cratered at times.
While Peloton is a household name, it does not have the runway of liquidity that Fitbit had and may not be in a great bargaining position.
