The Investing Lesson of Mastodons
Herds of modern-day mastodons are running wild over the business landscape.
Today, I’ll open your eyes to them.
I’ll even reveal a few of their favorite hiding places.
Once you’re able to spot a modern-day mastodon, you’ll easily knock 10 years off your retirement date.
First, let’s rewind the clock 10,000 years — to a period when mastodons seemed poised to rule forever.
>> Mastodons were durable, having survived several ice ages.
>> Mastodons had good aesthetics, with beautiful tusks and long reddish-brown hair.
>> Mastodons were highly mobile, with footprints and fossils discovered all over the world.
>> Mastodons were awesomely efficient, too, surviving solely on a diet of leaves.
With that many positive attributes, what went so horribly wrong?
Turns out mastodons weren’t adaptable.
The day humans began hunting with spears, the extinction of mastodons became an inevitability.
Modern-day mastodons suffer from the same inability to adapt.
Think of the extinction of BlackBerry when the first iPhone hit.
Or Blockbuster’s death when Netflix arrived.
Or Borders’ demise when Amazon took off.
If you didn’t make a fortune on the extinction of those three companies, no worries…
Below are three modern-day mastodons headed for extinction.
We’re projecting at least a 25% downside move for all of them by the end of the year.
So get your “shorts” on, ASAP!
Sears’ Road to Ruin
Mastodons were apex animals in their ecosystem, the largest and most impressive species in North America. That is, until humans came along.
Likewise, Sears Roebuck, the predecessor of Sears Holdings (NASDAQ: SHLD), at its peak was a magnificent specimen of retailing. It was the largest U.S. department store chain, owning the world’s tallest building, in Chicago.
The first big hit to its business came in 1993, when it closed the Sears Roebuck catalog as general merchandise mail order became less profitable.
Then in 2005, the billionaire Eddie Lampert merged it with Kmart to form the current company. The principal attraction was the giant holdings of real estate in both retailers.
Since 2005, SHLD has generally made losses, with cash injections from borrowings and sales of real estate. In the year ending January 2017, the company lost $2.2 billion and has continued losing money since.
Sears Holdings is a major victim of the move to internet retailing — along with the decline in department stores and shopping malls.
Indeed, the company has survived only because of Lampert’s bailouts.
Now Lampert owns more than half the secured debt and only 28% of the equity. The company has a tangible equity deficit of $5.2 billion. So SHLD may be worth more to him dead than alive.
The stock has dropped 85% in the last five years and the last 15% won’t take long to disappear.
Cue the Closing Credits…
The movie theater used to be a big deal, especially during the summer.
I remember those days fondly… piling into the car on a searing sunny day and heading to the big screen where it always was nice and cool.
Throw in a bucket of buttery popcorn and a giant soda… and was happy.
In 2017, however, many homes sport a large-screen high-definition TV, surround sound and infinite sources of streaming content to watch.
And moviegoers are fed up with paying $20 or more for a ticket to see a rehashed version of last year’s hit movie.
Especially when at $9.99, a Netflix subscription provides access to thousands of HD titles.
According to comScore, early-summer box-office revenue declined 10% from the same period in 2016 — and 20% from 2015.
On the other hand, streaming-TV giant Netflix reported second-quarter subscriber growth of 5 million.
The curtain is about to come down on the once-mighty movie theater industry.
How do you play the downside? Consider Regal Entertainment Group (NYSE: RGC).
Shares are already down more than 30% from their 52-week high.
And 2017 full-year earnings are expected to decline 8%, versus bottom-line growth of 1% for the broader entertainment industry.
At 15 times forward earnings, these shares might look like a bargain compared with the S&P 500 (19).
But as the famous line from Star Wars delivered by Adm. Ackbar goes… “It’s a trap!”
Prepare the Burial Plot for Snap
The sad, expensive social media failure that is Google Plus is about to get a new graveyard mate in Snap (NYSE: SNAP).
Yes, I know the social media company is a recent Wall Street darling. It just completed a highly anticipated IPO only six months ago and earned a staggering valuation of more than $24 billion.
But make no mistake — it’s a mastodon hiding in a unicorn’s clothing.
It’s completely unadaptable.
At its core, Snap is simply a feature (ephemeral photos and videos), not a true product or platform. So it can’t be easily subdivided or pivoted to unlock new growth. It’s already been distilled down to its essence.
If you have any doubt, look at management’s already half-baked attempt to pivot and adapt.
Right before its IPO, the company changed its name from Snapchat to Snap — and its company description from a leading social media platform to a camera company. This, of course, coincided with the launch of Spectacles, which are camera-enabled glasses that seamlessly connect with the app.
The move didn’t change a thing. The company is still an app company. The glasses are pointless otherwise. Sure enough, Spectacles are proving to be a flop.
During the most recent quarter, Snap booked about 3% of sales, or $5.4 million, in the “other” category, which includes Spectacles. This implies that Spectacles sales dropped to about 40,000 units.
Keep in mind, this is only the second full quarter that Spectacles were available. With growth already declining, the pivot has clearly been a failure.
The only thing worse than Snap being stuck as an app company is that it can’t even remain competitive in its niche market. Why? Because anything Snap can do, Facebook can do better. And does.
Case in point — Instagram Stories. This is a pure copycat move by Facebook and it already boasts more users than Snap.
Anything else Snap innovates, Facebook can and will do better… and on a bigger scale… because there’s no patent protection to prevent it.
Heck, even Apple is getting in on the action. The latest additions of animated emojis to iMessage are blatant rip-offs.
Frankly, Snap is vulnerable to attack from all the major tech companies.
Or as one analyst put it, “Facebook/Instagram and YouTube are quick followers, constantly improving their value proposition [with Snap-like features] as well, at materially greater scale.”
In other words, even in a survival-of-the-fittest showdown of mastodons, Snap is doomed, too.
At this point, I’m convinced that shareholders’ only hope is a mercy killing via acquisition. Ironically enough, Google is reportedly interested in acquiring Snap for $30 billion.
Google Plus might be resurrected from the dead after all! Or not.
Snap suffers from a wonky ownership structure, which affords absolutely zero voting rights to everyday shareholders. That’s right! Voting rights are concentrated entirely in the hands of executives, including 88.5% in the hands of the company’s two co-founders.
It’s written in Proverbs 16:18 that “Pride goes before destruction, a haughty spirit before a fall.” And I can’t think of a more prideful and haughty move than denying shareholders a vote.
Even Snap admits to it. The company proudly boasts in its IPO paperwork that “to our knowledge, no other company has completed an initial public offering of nonvoting stock on a U.S. stock exchange.”
That means Snap can easily continue rebuffing takeover offers as a result of misplaced arrogance that the company can succeed on its own.
As Charles Elson, a professor at the University of Delaware and expert on corporate governance, puts it, “The rationale behind the [structure] is pretty simple, that ‘I’m a genius and leave me alone to let me be a genius.’”
Clearly, Snap’s Spiegel is not a genius. The price to pay for stupidity is steep — death. Bet on it!
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily