When The Music Stops
3 Things an investor should never say.
Life is constantly trying to teach us new lessons. We just have to pay attention.
It’s the same way in the market, and this week, Peloton (PTON) literally screamed a lesson that all investors and traders should heed.
But to fully understand this lesson we first have to look at another stock, FuelCell Energy (FCEL).
FuelCell was a hot EV stock in 2020, gaining 1400% in just over three months.
A lot of investors, many of them newbies, piled into the stock thinking they’d found some new undiscovered gem.
There were also the standard narratives about FuelCell’s “unlimited upside potential” due to the fact that electric cars are awesome and going to cure cancer, or something to that effect.
But what most of these traders didn’t know is that FuelCell has been around since the mid-90s. I used to trade it myself during the dotcom boom.
It was big winner back then, gaining 2300% in just 18 months, before the boom went bust.
Then FCEL proceeded to spend the next 20 years losing 99.9% of it’s value and incurring two 1 for 12 reverse splits along the way.
In 2020, Peloton was also hot, gaining 940% in 10 months. But since hitting its all-time high, the stock has dropped 85%.
Peloton’s price action is trying to teach us the same lesson that FCEL - and thousands of other stocks (including a boatload in this week’s Market Strategy video) - have tried to teach us in the past.
Once the hot money leaves a growth or momentum stock, there’s rarely a second act.
Or a least not for a long time.
Investors who don’t understand this dynamic assumed money would come rushing back into Peloton when it dropped from almost $170 to $120.
If not then, certainly when it dropped to $85 going into it’s last earnings announcement.
After all, it had lost 50% already. Enough is enough.
But when the company missed earnings and announced that they were discounting their products, the stock closed at $55.
Surely the hot money would come back in at that level?
Yet, on Thursday, when the company announced they were halting production of their bicycles and treadmills due to lack of demand, the stock closed at $24.31 – 85% off it’s all-time high.
What’s next for Peloton?
Is it done going down?
Could it go lower?
You bet it can.
But either way, it’s a great lesson, one that reminds us of the three things investors should never say about a losing position.
“It will recover with time.”
“It has to bounce at some point.”
“How much lower can it go?”
As for FCEL, well, it has lost 86% in the last 11-months.
It should be ready for another run in 2040.