Published March 07, 2017

Don’t Even Think About Buying This Lottery Ticket

By Justin Spittler

Sell! Sell! Sell!

That’s not something you hear on Wall Street often.

But that’s what everyone is saying about Snapchat.

Snapchat is a self-described “camera company.” But it doesn’t actually make cameras. It operates an app that runs on iPhones and other smartphones.

This app lets you take pictures and put silly “filters” on them. You can share those pictures with your friends and family.

It’s extremely popular with young people. More than 150 million people use it every day.

Still, Wall Street hates the stock.

In fact, it doesn’t have a single “buy” rating right now.

That’s unprecedented.

Sell-side analysts are almost always bullish on the stocks they cover. Hell, Wall Street had a consensus buy rating on Enron right up until the world found out it was a giant fraud.

That’s not the case with Snapchat. According to Bespoke Investment Group, it’s the only company worth more than $20 billion that doesn’t have a single buy rating.

Incredibly, this didn’t prevent Snapchat from having a very successful initial public offering (IPO).

• The company raised $3.4 billion when it went public last Thursday…

That day, its stock surged 44%. It jumped another 11% on Friday.

In just two days, it went from a $20 billion company to a $31 billion company. The giant retailer Target isn’t even worth that much.

By now, you’re probably wondering why I’m talking about Snapchat. After all, social media stocks aren’t Casey Research’s bread and butter.

But here’s the thing.

Snapchat’s blockbuster IPO is about much more than one company. It reflects the mood of the entire investment community. It could even mean that the U.S. stock market is close to peaking.

I’ll explain why in a second. But you need to first understand why Wall Street is so bearish on SNAP.

• Snapchat is a “lottery-like” stock…

That’s according to Laura Martin, a senior analyst at the investment bank Needham & Company.

Martin and her team have given Snapchat an “underperform” rating. This means they expect it to do worse than the S&P 500 in the coming months.

Needham also has an average price target of $21 on the stock. That’s 22% lower than where Snapchat closed on Friday.

Needham is bearish on Snapchat for a few reasons.

For one, it thinks the company will have serious trouble growing its sales. It also says the company has “no clear path to profitability before 2020” and is trading at “frothy” valuation.

• Needham isn’t the only investment bank critical of Snapchat, either…

Here are a few other reasons Wall Street doesn’t like Snapchat.

Shareholders don’t have voting rights. This is unheard of.

When investors buy a company’s shares, they’re supposed to become owners of the company. This arrangement includes a say in how the company runs its business. Snapchat shareholders don’t get this right.

Now, this might not be a huge deal for everyday investors. But it’s a serious red flag for investors with deep pockets.

Snapchat is an immature company. It’s not even six years old and it only has one product—if you can even call it that. Plus, the company’s CEO, Evan Spiegel, is just 26 years old.

Snapchat shareholders are betting on a team that hasn’t proven itself yet.

Snapchat isn’t profitable. Last year, the company lost $515 million. And as Needham pointed out, it could be years before the company turns a profit.

That alone should have kept investors away from Snapchat. Instead, people paid as much as $84 for every dollar of sales that Snapchat generates. That’s nearly six times what investors are paying for a share of Facebook (FB), the world’s dominant social media company.

• By now, you’re probably wondering who the heck bought this stock…

Millennials, that’s who. USA Today reported yesterday:

Online stock trading app Robinhood, whose core demographic has an average age of 30, says that Thursday was its biggest day ever, and that 43% of all its traders that day went for Snap stock…

The median age of Robinhood investors buying Snap on Robinhood has been 26, the same age as Snap CEO Evan Spiegel.

We've got nothing against millennials. But let’s be real.

Most of these people have no investing experience whatsoever. They certainly don’t know what the top of a bubble feels like.

A lot of Snapchat’s younger investors didn’t buy the stock because it’s a great investment. They bought it because they use the app every day.

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• Erik Benson says Snapchat’s IPO is a clear sign of a “market peak”…

Benson is a partner at Voyager Capital, a venture capital firm based in Seattle. He was an early investor in more than a dozen successful technology companies. In other words, he knows a good technology investment when he sees one.

Last week, he said the following about Snapchat’s IPO:

If SNAP does have a successful IPO, I’m moving all of my investments to cash as it will be the leading indicator of market peak.

After Snapchat soared over 50% in two days, I wouldn’t be surprised if Benson’s holding more cash than he’s held in a long time.

We recommend you do the same…

• After all, investors are acting like nothing can wrong…

They feel invincible. They're buying first and asking questions later.

This is how investors act when the stock market goes almost a decade without a 20% drop.

Unfortunately, all good things come to an end. The current bull market won’t be an exception.

If you haven’t already, we encourage you to take steps to protect your wealth. Here’s how you can get started.

  1. Set aside more cash. Holding extra cash will help you avoid big losses if stocks fall. It will also put you in a position to buy stocks when they get cheaper.

  2. Own physical gold. Gold is the ultimate safe-haven asset. It’s survived every financial crisis in history. It will certainly survive the next one.

  3. Close your weakest positions. Start by selling your most expensive stocks. They tend to fall the hardest during major selloffs.

Most investors won’t take these simple precautions. They’ll wait until a massive panic begins to take action.

Don’t be one of those people. By then, it will be like trying to escape from a crowded theater after a fire’s broken out.


Chart of the Day: A Lesson on Buying the "Next Big Thing"

Don’t fall for sexy stocks.

Today’s chart shows the performance of Lending Club (LC), the world’s biggest online lender.

Three years ago, a lot of people thought Lending Club would revolutionize the lending industry. It was supposed to beat banks at their own game.

But the company couldn’t live up to the hype.

You can see its stock has plunged 78% since it went public in December 2014.

We’re showing you this because Lending Club isn’t that different from Snapchat. Like Snapchat, Lending Club went public to much fanfare. And many people thought it would be the next big thing.

In other words, both companies had great stories. But that doesn’t make them great investments.

We would much rather own companies that sell things people can’t live without. We’re talking about the essential goods and services that never go out of style.

Tomorrow, we’ll have more to say about these types of companies…

Regards,

Justin Spittler
Delray Beach, Florida
March 7, 2017

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