Related tickers: Chipotle Mexican Grill, Inc. (NYSE:CMG), Cliffs Natural Resources Inc (NYSE:CLF)
You feel sick to your stomach. Months of research, hours of financial planning, piles of articles and financial and advice, and finally you felt like you had found a real good buy-and-hold opportunity for the next 3 years at least. But now? Now you are trying to pick up the pieces of a once hopeful investment gone bad. You look yourself in the mirror and try telling yourself it’s going to be ok. “Oh well,” you say. “Can’t win ’em all.”
No investor has a perfect track record. Therefore, we all have at some point wondered what to do with an investment that didn’t go as planned. Sometimes, the stock has just stagnated. Other times, the plane has crash landed. So, you lost most of your investment. Now what?
Double down
Image: Chipotle Mexican Grill, Inc. (NYSE:CMG)
Let me illustrate. Let’s say you purchase 100 shares of Company X for $40 a piece. You are very happy to now be the proud owner of Company X. Unfortunately shortly thereafter, shares of Company X avalanche to a measly $10 a share. You’ve lost 75% of your investment. However, you decide to double down and buy another 100 shares at the new price.
With 100 shares at $40, and 100 more shares at $10, your average price per share is now $25. If you don’t double down, you need shares to rally to $40 just to make your investment back. By doubling down, shares need to rally only to $25.
So, double down?
Double down can be a fantastic strategy…in some cases. The crucial question you must ask yourself is: “Is this company a good company to buy?” In other words, this is an investment like any other. You need to evaluate the company, take inventory of the opportunities, and assess the risk, just like anytime you invest. You only want to invest in the winners.
Chipotle Mexican Grill, Inc. (NYSE:CMG) is the profile of a winner in my book. However, I am hesitant to say that, for fear of the backlash that is sure to come from those who invested at the peak last year at around $440/share. If you invested at the peak, I’m sorry. I know that hurts.
Don’t let your pain keep you from seeing the truth that Chipotle Mexican Grill, Inc. (NYSE:CMG) is a winner.
CMG Revenue TTM data by YCharts
It’s hard to keep up with the sensational growth that this company has been able to attain. Their balance sheet is rock solid. And with another 180 locations planned for this year, not to mention the barely tapped international expansion, there are dozens of reasons to think that this company will continue to perform well for investors.
Let’s say you bought in at $430/share; near the peak. Bad timing, and I’m sorry for you. But even when the stock fell, several of the reasons I’ve pointed out should have led you to believe in the company’s long term prospects. If you had doubled down at $250/share (not even rock bottom), at today’s prices you’d be back at even for your investment. You’d have hit the reset button, but still with years of a promising outlook ahead of you.
Another stock that may fit this description is Cellcom Israel Ltd. (NYSE:CEL). This stock had a pretty sickening drop from where it stood at $35 in December 2010 to the bottom at about $5 this past July. I was actually an investor at around $30, and didn’t pay attention to what was going on and road it down to the bedrock.
However, I didn’t take my own advice and double down at the time. Why? I was concerned with what was going on in Israel with the communications companies. Many new players had flooded the market offering cheaper communication solutions. The bigger companies, like Cellcom Israel Ltd. (NYSE:CEL), were bleeding costumers, and I was unsure of where the company would go from there.
The response to the changing economic environment by the company was good, and I once again have reason to believe that the worst may be over. There was quite a price war between players like Cellcom and the new contenders trying to offer the best deal to Israeli costumers. One of the side effects from this was that Cellcom Israel Ltd. (NYSE:CEL)’s revenue per customer dropped big time in 2012. But some analysts now think that the promotions will be coming to an end, and revenue per user should jump back up. With a forward P/E currently under 3, this might now be a double down candidate. (And, for the sake of transparency, I personally tripled down recently.)
Cut your losses, learn your lesson
There is another side to the double down coin. It’s called “cut your losses and learn your lesson.” Sometimes you’re not going to want to invest more money into a company because frankly, you’re doubtful of the company’s future. Might I suggest this may be the case with Cliffs Natural Resources Inc (NYSE:CLF).
Plenty of people are telling me that this stock is cheap right now and that the Chinese economic slowdown has been greatly exaggerated. And that may be true. The issue for me at this point are the questionable management decisions that have gotten Cliffs Natural Resources Inc (NYSE:CLF) to this point; the greatest of which may be the $1.4 billion hit the company took as a result of their Consolidated Thompson acquisition.
Companies that make $1 billion mistakes don’t make me comfortable in investing. Sometimes it may be tempting to double down on a company just to try to earn your investment back. But that’s not how investing should be. You should only buy companies that you believe to be winners, who have room to grow over the long term. Cliffs Natural Resources Inc (NYSE:CLF) just isn’t that for me.
Conclusion
We aren’t trading stocks. We are buying businesses. Sometimes our investment will lose money. It is there that we should reevaluate our view of the company. If our convictions about the quality of the business remain unchanged, consider doubling down. If we now see the company in a new light, it may be time to move on. Fortunately there is a silver lining. Even when we lose an investment, we can learn from our mistakes, and become better investors in the future.
Jon Quast owns share of Cellcom Israel. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill, Inc. (NYSE:CMG).
