Should You Buy What You Buy?

  • One of the underlying belief of discount brokers is the notion of buying what you know.
  • This is something which leads to the recent Fitbit IPO. Should you buy Fitbit at its current earnings multiple of 150x?
  • So, buy what you know only when it's priced rightly as an investment.
Should you buy what you buy

One of the enduring tropes of ads for investment firms, especially discount brokers, is the notion of buying what you know. If you buy something, a product or a service, or if you go to a store and see it crowded, the idea is, you should buy that stock.

But what if you really like your Blackberry (NASDAQ:BBRY). I never go to the most popular restaurants anymore – they’re too crowded.

Sometimes, of course, this works. Had I bought Apple (NASDAQ:AAPL) shares when I first fell in love with my iPod a decade ago I’d be in clover by now.

Which brings us to Fitbit (NYSE:FIT).

Fitbit IPO was the hot IPO of the last month. Originally priced at $20, it opened at $31, and then started rising to its present level of $38. At that price it’s trading at 150 times earnings, and about 9 times last year’s revenue of $745 million.

I bought one of the bands the day before the stock opened, and I like it. It tells me my heart rate when I exercise, it measures my walking, and it even beeps when I get a phone call. But I didn’t jump on the stock, and part of me is sorry about that.

Because I’d love to be selling it right now.

This is a real company with real numbers and real prospects. It’s not like the dot-com companies of the past that were being sold on hype. There is, as Gertrude Stein might say, some “there” there. The company is profitable, and brought 20% of revenue to the operating income line last year, with nearly $132 million – almost 18% of the total – making it into net income.

Now there is competition, from companies like Garmin (NASDAQ:GRMN) and Jawbone. There’s the Apple Watch. There’s the fact that this device hasn’t been approved by the FDA, an expensive and time-consuming process that, still, might make it available through insurance.

The point is there are reasons to be confident in this company and its future. But if you’re buying now, you’re not buying those fundamentals. You’re buying the momentum of its rising because it’s rising, the kind of stock boom that always ends in tears. Right now this is a stock for gamblers, plungers, those shut-in executives who like sitting at screens all day.

This is not to say that the method “buy what you know” is an automatic loser. There are several companies in my personal portfolio whose products and services I know and like. These include Costco (NASDAQ:COST), the warehouse club I visit regularly, and Kroger (NYSE:KR), the grocery store I visit when Costco’s quantities get to be too much. I like Starbucks (NASDAQ:SBUX), I do have some Apple, I have some Amazon (NASDAQ:AMZN), and my own discount broker, an outfit I like to call my “bookie,” the discount brokerage Charles Schwab (NYSE:SCHW). Schwab, in fact, is one of the stars of my current portfolio.

So, yes, buy what you know. Just try to buy it when it’s priced as an investment. Unless you really like looking at screens all day.

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