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Avoid Sucker Stocks: Beware New Stock-Buying Apps

Rocco Pendola|Contributor
Monday, 25 Jun 2012 | 12:33 PM ET
Crocs
AP
Crocs

I had to do a double take when I saw the news from TheStreet’s Gary Krakow last week.

TD Ameritrade Holding upgraded its mobile app to include a feature — “Snapstock” — that allows customers to scan the UPC barcode on a product, download information on any public company behind the product, and then buy the stock of that company right there on the spot. TD tells us that this functionality “allows investors to approach shopping through a whole new lens.” It also takes the Peter Lynch invest-in-what-you-know concept to a whole new level.

Face it — in practice, it’s really invest in what you sort of think you know, but you don’t and hope for the best.

I’ve never been a fan of Lynch’s model. He makes investing sound way too easy. He gives instinct and intuition too much credit. The idea that we can just pluck “10-baggers” out of the air by recognizing the things we see people, including ourselves, buying and using day-to-day, stinks. It’s dangerous. This new smartphone app runs the risk of upping the ante vis-à-vis impulsive and uninformed investment decisions.

To be fair, TD deserves some credit. It’s one of a handful of retail brokerages that provides solid platforms for a wide range of investors. And this app allows you to gather information and add stocks to a watch list. TD offers the option to make a trade, on the spot, as just one of the features. Ultimately, it’s up to the individual investor to not abuse the convenience.

But, for many, it will likely prove all too easy to abuse. Perhaps those who are most prone to hurt themselves will not be at the stage of their investing lives to even get wind of the app in the first place. Then again, something like this could actually open the door to the uninitiated, making it more likely for beginners to make costly mistakes.

However it shakes out, it got me thinking about the Lynch way. Like any other model, it often works wonders. Think stocks like Apple and Chipotle Mexican Grill. If you walked into an Apple Store or a Chipotle location three, four, or five years ago, acted on Lynchian instinct and bought the stock, you’re better off for it today. But, for every Apple or Chipotle, you’ll find quite a few dogs, fads, and fleeting phenomena you probably should have left alone.

Consider the ideal sucker stock of days gone by: Crocs.

Even without the ability to buy instantly, this one certainly puts the hurt on more than a few bored husbands. You’re sitting on one of those soulless benches in the mall waiting for your wife to finish shopping at Limited, Fashion Bug, or somewhere. You glance over at the crowd around the Crocs stand in the middle of the mall. You look to the floor and passing below are all sorts of feet — baby feet, hot-girl feet, fat-guy feet, fungus-infested feet, you name it — and they’re all wearing these rubber slipper-looking things.

This, of course, was during the 2007 holiday season when “everybody” was wearing Crocs. Wall Street tends to get the jump on trends, sending a stock higher as a fad builds and ruthlessly selling it off just prior to its abrupt death. Enter the retail sap who buys not only the height of the fad, but the top in the stock.

Over the last five years, Crocs is down about 65 percent. Since it topped out in October 2007, it’s off roughly 77 percent. The new TD app could make it easier to buy a sucker stock like Crocs, while guarding your wife’s purse.

Here’s an even better example. One that makes me happy to have seen my kid grow. Another sterile mall experience: You watch rug rat after rug rat, including your own, walk in and out of Build-A-Bear Workshop. This app would have made it even easier to buy the height of that short-lived craze.

How many people even knew Build-A-Bear was public anyway? Scan the UPC code on one of the bear carcasses near the entrance and you find out it is. And, hey, you gotta love the sexy ticker without the big and beautiful stock price. In fact, Build-A-Bear has been a low-priced stock for years now, which only adds more suck to the ultimate sucker bet.

Unless you’re a savvy trader, Build-A-Bear has likely done little more than sit on you and squash you. No romance. No fun. Nothing kinky. Just a good old-fashioned butt-whipping.

Over its life as a public company, it’s down about 83 percent. It’s off 37 percent over the last two years and 29 percent over the last 12 months.

Other than a few head-fake rallies and dead-cat bounces, it’s a sucker bet. I simply cannot buy Sham Gad of TheStreet’s bullish take on the stock.

Gad risks falling headfirst into a value trap, noting that, “A successful resurrection with a return to sales growth is probably worth a doubling, if not tripling of the stock price.” This is way too hopeful and optimistic, even for a company that (annoyingly) refers to its management team as “bears.” For example, Maxine Clark is the company’s founder and “Chief Executive Bear.” Please.

I appreciate the utility of smartphones. By and large, technology advances society. However, we often take things too far in the name of progress and ease of access and execution. With that in mind, I hope investors who use TD Ameritrade’s “Snapstock” feature do so responsibly.

—By TheStreet.com Contributor Rocco Pendola

Additional News: 10 Apps to Help You Keep Your Financial Resolutions

Additional Views: Cramer’s Stocks to Avoid

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Rocco Pendola held no positions in any of the stocks mentioned.

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