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Here is the question. What is the difference between a distressed stock and a distressed company ? Problem stocks are easy to fix. They often recover on their own, so they can be very attractive to buy. But troubled companies? No, they take forever to correct, and in the meantime their shares become very dangerous for your capital.
We now have a lot of " broken" stocks of growth companies. So I want you to be able to distinguish between viable distressed stocks and uninvestable distressed companies. These are two very different things. Let me give you a textbook example. I want you to take a look at Square. SQ , a fast-growing payments technology company that has long been a Cramer favorite.
For years, this promotion has been one of the best on the market. Of course, it suffered greatly during the massive market collapse in late 2018, but then recovered rapidly. As recently as August 1, Square shares were trading at $83. This is an increase of almost 50% in 2019. But then she hit her head against the wall.
The company reported a quarter that didn't really impress Wall Street. The next day, the stock fell to $69. And you know what? As you can see, they have continued to fall since then, to $59 today. Suddenly, this former market darling became a real battlefield. So, I'm sitting here looking at this and, of course, I feel guilty for not telling you to take a profit .
And I didn't do it. It's my fault. But as much as I'd like to pretend this fall never happened, we have to address it head-on, because this is a show about responsibility. Also, more importantly, we need to figure out whether Square is an attractive distressed stock or a repulsive distressed company .
So, let's outline the situation. Two months ago, Square seemed like a powerful company. They built a huge payment network with their little credit card readers, you know, those little white things? You connect them to your smartphone and it turns into a POS terminal. Even better, Square has a great idea of how much its customers are earning.
If they don't just run a cash register, the company has a fast-growing lending operation—Square Capital. No bank has such an understanding of its borrowers. And because Square controls the payment system, if you borrow from them, they can simply deduct the interest payments directly from your earnings .
Until recently, stocks of fintech companies were incredibly popular as hedge funds worried about the economic slowdown. These portfolio managers need to have a certain proportion of financial assets, as this sector makes up a huge portion of the S&P. But banks usually perform poorly during recessions, so they switch to hot fintech stocks.
They switch to Square. However, in the past few weeks, fears of a recession have subsided. You saw it with rising interest rates, and that 's why fintech is going out of fashion. But Square's stock started falling long before this rotation began. So what causes this weakness? I think it's a management issue, but it's more of a cosmetic issue, so don't worry.
Square has always had an unconventional CEO —Jack Dorsey. He is also the CEO of Twitter. I used to joke that he was a part-time CEO. And do you know why? And you know what? It did n't matter. At least until Square had a fantastic CFO, Sarah Fryer. You may have seen her on the Scott Wapner show the other day.
She is wonderful. And, well, Sarah kept her eye on the matter . Dorsey lured her from Goldman Sachs in 2012. And I still believe it was the best management decision he ever made. She was so good and remains so. Moving on, since she left Square, and you know what? That's all. Eleven months ago, we didn't have anyone who could take over the company, and I think that explains a lot of what you're seeing now, you know?
The stock sank seriously when Sarah left. Wall Street trusted her, and that was the main thing, because she had a very sober mind. She was a brilliant professional at Goldman. I certainly don't mean any disrespect to her successor, Amrita Ahuja, who came from Activision. Listen, Ellison, institutional investors have become much more skeptical since Fryer left.
I actually thought they had a pretty strong bench, and that's where I was wrong, or at least that's where the stock market was wrong. Since then, every time Square reports, they give good overall figures and then give confusing or even disappointing forecasts. This is exactly what happened at the end of February.
And while the initial reaction of the stock was volatile, the damn thing continued to slide steadily downward for the next 3 months . Fast forward to the next earnings report in May, and what do we have? And Square stumbled on a flat spot. Although the company delivered strong results in terms of revenue and profit, they only confirmed their forecast instead of raising it.
This is exactly what you need to hear if your stocks are to grow. And the outlook for the next quarter was weaker than expected, so the stock fell steadily over the next month before bottoming out at $60 in early June—about where it's trading now. But during June and July, Square soared above $80 again with almost no news.
Oh, yeah, some positive analyst talk and, of course, that “bullish” fintech market I just mentioned. It seemed like maybe, well, maybe Square was past the worst. Then the company reported after the close of trading on August 1, and guess what? That's when the wheels fell off the bus. This time we saw the same damn scenario: earnings better than expected, sales better than expected, but they left the full-year forecast unchanged, and then gave conservative forecasts for the next quarter.
Literally the same as in May, except with stronger headline indicators. In addition to this, Square told us that it is exiting the food delivery business. Management is selling its Caviar delivery service to DoorDash for $ 410 million. I think they got an incredible price, just unheard of, and I say this as a Caviar customer for both my bar Brooklyn Tavern and my restaurant The Longshoreman.
Trust me, you don't want to be in the online delivery business. The margins there are simply impoverished. But this time, Wall Street finally ran out of patience with Square. Financial managers got tired of good quarters under conservative forecasts, so the next day the stock fell 14% and continued to fall.
That's how they slid below 60. It also didn't help that turbo- growth companies like Square went out of fashion as investors switched to more economically sensitive stocks that benefit from lower rates, although there was a brief respite from that today . So what the hell are we supposed to do with this thing?
With this former market darling? What will happen now? So, last Tuesday, three different analysts published seriously contrasting opinions on Square. I always like to interview analysts to understand what the bulls and bears are thinking . On the bearish side, Atlantic Equities initiated analysis of Square with an “ underperform” or “ sell” rating and a $55 price target.
This is part of a broader report on the fintech sector, where they view Square as one of the least attractive players because, in their view, the company's core business is slowing down. While the company is trying to expand into consumer payments with its Cash App, which I really like, the guys at Atlantic simply see the future of this business as uncertain, as they believe it is crowded with strong competitors like, yes, Venmo, remember PayPal?
On the bull side, Square received two rating upgrades : one from Moffett Nathanson, the other from SunTrust. Lisa Ellis of Moffett Nathanson, a brilliant analyst, gave a " buy" recommendation with a target price of $85. She claims that the shares have become too cheap. She likes the power of Cash App.
Yes, and she agrees with me about selling Caviar. Goodbye, goodbye. How about a " buy" recommendation from SunTrust with a price target of $80? They see Square investing heavily to capture market share among larger and more sophisticated retailers and restaurants, rather than its current primary source of revenue.
And they see the sale of Caviar as the first step in this reorientation. It would just be "normal." People don't like to hear " spend, spend, spend." What am I leaning towards? I agree with Lisa Ellis of Moffett Nathanson. and previously these were extremely expensive stocks. They are currently selling for 8.3% annual sales volume and 53% annual projected profits.
I know, I know, I know, I hear you . Yes, that's a high figure, eight times sales. But listen, considering the company has a 46% long-term growth rate, I think that's reasonable relative to the growth rate. This is the main conclusion. Square's fundamentals are solid. They are reliable , I know that.
This is not a broken stock. I mean, let me clarify this. The stock is now “broken ,” but the company is not broken. This means that you can absolutely buy it, and I have to say that in my opinion, you can buy it now. In the worst case, it will fall a little more, and the stock will become even cheaper.
I just wish the new CFO could tell a story as well as Sarah Fryer did. If that were the case, since the company is not broken, but only the stock, it would be worth significantly more. ? Send Kramer # us at .
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