Monday, January 2, 2017

Bit by FitBit. An investing lesson relearned

"Behind every stock is a company. Find out what it's doing."Peter Lynch,  Fidelity Magellan Fund manager from 1977 to 1990, during which time the fund's assets from $20 million to $14 billion. (1944 -   )   

There’s a lot to like about FitBit wearable health and fitness tracking devices. Interactive with a smart phone app, a FitBit – worn like a wrist watch -- will track the steps you take every day, calculate how many stairs (or the equivalent elevation gains) you climb daily and give you your heart rate at any given moment. While asleep, a FitBit can detect how many times in the night you become restless, roll over or get up to raid the refrigerator.

Using the app, you can clock in your daily water and food intake and track your overall physical performance in terms of calories in and calories out.

The app uses clever graphics and trends charts to show you your progress. It rewards you with "badges" when you reach certain milestones. All very clever.

After receiving a FitBit as a birthday present last year, I was so impressed with the product that I bought stock in the publicly traded company, FitBit Inc., headquartered in San Francisco. In 2015, the company reported revenue of $1.86 billion on sales of 21.4 million "connected health and fitness devices."

Last week, I sold my FitBit stock investment at a 70 percent loss!

This lesson is something I occasionally must (painfully) relearn: Don’t be a gambler (you idiot), be an investor!
These are the rules (my rules) that I violated:

  - I bought the stock on an emotional whim rather than after taking time to do research on the company, its products and financial performance. If I had done that I would have noticed that FitBit management and the stock were under pressure in late 2015.

  - I failed to evaluate FitBit competition in the wearables market. Competition from the likes of Apple and Samsung, not to mention smaller competitors. 

  - Fitbit does not pay shareholders a quarterly dividend. Instead, investors are in it for a hoped-for big run-up in share price. Only buy a stock like this if you can afford to lose every cent that goes into the gamble.

  - I failed to recognize the techy trendiness of Fitbit products, not unlike GoPro wearable/mountable cameras. GroPro stock had peaked just a year earlier (2015) at $82.35 a share and then plummeted over the next 12 months to $17 a share. That was just about the time that I was falling in love with FitBit.

A month (January 2016) after my investment, FitBit was hit with a class action lawsuit claiming that its heart rate technology was not accurate enough for people with health issues. Turns out that this technology in all wearables is a bit iffy. The negative news churned around for the next six months.

In quarterly reports, the company’s earnings per share had weakened even as revenue (sales) were increasing. The share price went from about $30 to $12 by the end of March 2016.

At that point, I decided to hold the stock until the end of the year for tax purposes. Selling FitBit at a long-term (owned more than 12 months) capital loss can be used to off-set any long-term capital gains incurred during the year from other stocks sold at a profit. This gave me some comfort.

Meanwhile, my own FitBit that I was wearing pretty much all the time began to physically come apart after 10 months of use. The colorful rubbery housing became unglued from the postage-stamp electronic device sitting inside. I tried gluing it but that didn’t work. Durability of some FitBit products turned out to be an issue, which resulted in complaints on online reader boards. Click here.

To my surprise, I received a new FitBit for my birthday again, this past year! This one has a different flaw that aggravates me….in the night, if I move my arm, the FitBit face lights up to tell me the time. That’s like having someone turn a flashlight on in my face. I have enough sleep issues as it is, so I stopped wearing it. Apparently you can go to the iOS app and turn off the QuickView button. Haven't tried that yet, too busy.

Investment analysts at Standard & Poor Capital IQ (click here) , rate  FitBit stock as a HOLD with a 52-week target price of $11. The stock starts 2017 at $7.32 a share. At that price, someone might make some money if and when the company turns around. As an emerging growth stock in a fickle market, analysts see "limited long-term visibility" for FitBit share performance. In other words, they don't know where FitBit's share price might go.

Forecasts call for a 10 to 15 percent FitBit sales revenue increase in 2017. Earnings per share could to climb from 57 cents to 74 cents. As the leading provider of wearable fitness-tracking devices, FitBit still has potential, analysts said.
Negatives include stiff competition, manufacturing supply issues, rising costs and softer demand. FitBit product prices range from around $100 to $200.

A Zacks Equity Research post at, asked this week, “Is There Hope for FitBit (FIT) investors in 2017?” Zacks mentioned several of the negatives already described in this report. But then said that in spite of all the gloominess surrounding the stock, the fact that Fitbit is still No. 1 in the wearables market and apparently saw a good fourth quarter (2016) gives investors reason for hope in 2017.

Not for me.

I’m too busy relearning my own basic rule about not buying stock in trendy, techy companies that don’t pay a dividend. If I had 20 years to see how it all turns out, maybe I could justify continuing to own FitBit shares. But it is easier for me to sell, take the loss and move on.

There are gamblers and there are investors. I try to be an investor. An investor does the research, buys for the long-term and reinvests the dividends for 20 years.

Or as investment guru, Peter Lynch, says, "Know what you own, and why you own it."

In the case of FitBit, I didn't know what I owned. I just fell in love.

For more:
Understanding capital gains and losses, click here.
Going All-in: Comparing Investing and Gambling, click here.
What is the difference between investing and gambling? click here.
25 Rules for Investing, The Street,  click here.

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