While this article is about picking satellite stocks, I need to make a quick disclaimer. The vast majority of the investors in the personal finance enthusiast world are huge fans of index investing. I couldn’t agree with the philosophy more. It’s fantastic. We live in an investing wonderland where we can own thousands of companies with expenses being mere pennies.
There have been studies that stock picking doesn’t work. Monkeys throwing darts perform as well as experts in many real-world simulations.
So, as you might expect, I’m going to write something that goes in the complete opposite direction of the above.
There’s an investing philosophy called “core and explore.” Essentially, once you have a good core of diversified index funds set up, you can explore picking some stocks with a small portion of your portfolio.
I’ve been doing “exploring” for about ten years now. I want to share some of my successes and failures. I’ll include some other stocks that I didn’t invest in. Then I want to look at what we can learn from each of them.
Satellite Stock Successes
Most of these successes come with an important caveat… I often sell them too early. I get excited if a stock doubles in a short time and sell off a portion. The reason I do this is so I can lock in the gains. The stock would have to get close to zero for me to lose money.
Satellite Success 1: Chipotle
I love Chipotle. I wrote that it was a cheap stock in August of 2017. Remember when they had some health outbreaks? Restaurants tend to be extra vigilant and can sometimes be the safest places to eat at.
I followed up that article by buying a few shares. I went down a bit, so I bought more. I often dollar cost average with my satellite stocks. This is why I don’t take big stakes in them when I first buy-in.
Here’s what I bought it at:
I sold some lock in my gains:
And after about doubling my money, I sold the rest:
I thought I was the smartest person alive making money so quickly…
Chipotle now trades around $1500! I could have made 5x my money by holding!
You could say it was a failure because I could have made a lot more money. However, I made enough money to eat a lot of burritos… especially when I make them at home!
Satellite Success 2: SnapChat
I’m not a Snapchat user. I think I have an account somewhere on my phone – I’m honestly not sure. At the same time that I invested in Chipotle, I read that the kids all loved Snapchat. It seemed to be the next big thing. (Remember TikTok didn’t exist yet.) I put it on my radar to follow. It fell on some hard times so I decided it was cheap. I love a stock that has been decimated.
So I bought 1000 shares in October of 2018. Once again, I did some dollar-cost averaging as it continued to go lower. My average price was around $7 a share.
In February 2019, I sold a bunch at around $9 a share making around a 25% profit. That’s a good gain for 4 months, right?
In January of 2020, I sold another 100 shares at $17.45, around 150% profit.
In October of 2020, I sold 25 shares at $36.40, around a 420% profit.
Today Snapchat trades at around $54, my remaining 375 shares are up 671%. At this point, I’ve recouped my original $7000 investment and have $20,000 worth of Snapchat remaining that was essentially “free.”
I could give similar success examples with Pinterest, Facebook, and a solar ETF (symbol: TAN). The only one I haven’t sold too early was TAN. I have a different risk tolerance for an entire sector (as opposed to one company) that should continue to grow throughout the rest of my life.
These examples illustrate why I like to “core and explore” with satellite stocks.
Satellite Stock Failures
Of course, not every stock I pick goes up 5x or 10x like Chipotle or Snapchat. That would be crazy.
I have two failures that are very much the same. Rather than go into the specifics of when and how much I paid for the stocks, it’s easier to just explain what happened.
The two stocks are General Electric (GE) and USO (an oil ETF). I got into GE because it had dropped a lot and I thought it could turn around its business. It proceeded to get worse and worse. During that time, I kept dollar-cost averaging. I bought it as high as $17 a share and as low as $5.50 a share. It’s been a crazy ride, but overall I’m up 11% on the stock.
That doesn’t sound like a failure, but the stock had to nearly double (which it has done recently) to make a small gain, while the S&P 500 returned better gains. The failure was in the lost opportunity in not investing in something that could have done a lot better. I still have a high number of shares, as I’m hoping that it will recovery well once COVID is behind us.
USO is very much the same story. I had expected oil prices to up over the term, but it went in the opposite direction. The US has been making shale oil for some time and I think that’s driven down the cost of oil. With COVID there’s less demand for oil. Additionally, over the long term solar and alternative energies are going to make oil less necessary. Finally, Middle East politics and dynamics play a big role, even for this ETF that focuses on US oil.
It’s a lot going on which is why oil got to around negative $40 a barrel – it became a liability to actually hold and store oil last April. The market has stabilized and oil is up around $50 a barrel.
I ended up buying USO a number of times, again through dollar-cost averaging, and I’m down 2% overall. That’s not bad. Like GE, I’m hoping that post-COVID sees demand go up while supply is still limited because there’s less drilling going on now.
I still have a lot more shares than I would typically like (the result of dollar-cost averaging), so we’ll see where it goes from here.
Finding Your Satellite Stock
When I look at the satellite stocks I have that performed really well they had a few things in common:
1. Satellite Stocks With a Household Name
You know companies like Twitter, Snapchat, Under Armour, Chipotle, and Pinterest.
There are a lot of great, boring companies that make great money. They may work as a satellite stock for you, but I like a company I know.
2. Satellite Stocks With a Low Market Cap
I had the most success with medium businesses mostly worth somewhere between 5 billion and 20 billion dollars. I don’t want to put too much into a company that’s too small. It could go out of business. All of the above stocks were in this range. I had some luck with Facebook at 50B, but that’s because I could see a path for it getting to where it is today.
I was talking with a friend recently, and they were saying “Tesla! Tesla! Tesla!” The problem with buying Tesla now is that they are $825 billion company. That’s half of Amazon. It’s more than Facebook. It’s about a third of Facebook. It’s 75% of Google. I’m not saying that Tesla can’t get where those companies are someday, but they only sold 500,000 cars last year. That’s a valuation of 1.65 million for every car sold. That’s already a lot, but for Tesla stock to double now to reach Amazon heights, they’ll have to grow fantastically for a long, long time.
Chipotle, on the other hand, simply had to fix the E. coli issue and work on their online ordering system and investors were able to make 5x their money. It’s simply a lot easier to go from 8 billion to 40 billion than it is to go from 800 billion to 4 trillion (essentially the combination of Apple and Amazon).
3. Satellite Stocks have to be High Growth
This works with the above point about low market capitalization. It’s fine to have a low market capitalization, but the company also has to have the potential to grow. That’s often hard to figure out and where you have to get a little lucky. I have always followed technology more than anything else, so I naturally gravitate there. It’s also where there’s a lot of growth.
A bad example of my preferred satellite stock would be AT&T. It is a very mature company, it isn’t going to grow from $200 billion to $2 trillion any time soon. However, in full disclosure, I own AT&T because I love its 7% dividend yield. It serves a different purpose in my portfolio. I also feel that it could see some appreciation from HBO Max. It is the best value stock that I follow in my opinion. (Here are more ideas on picking dividend stocks)
Final Thoughts on Picking a Satellite Stock
There have been some crazy stocks doing some crazy things over the last year. I think so many are left at home reading stories about stock riches that they are investing in lots of stuff. It’s not just the Tesla story. There are other companies like FuboTV that jumped from $10 to $60 a share… only to “crash” back down to $27 a share. Gamespot went from $20 a share to an intra-day high of $140, and back down to $70/share all in the last few weeks. You could have literally doubled your money and lost half your money on the same day.
I’m not a big fan of that kind of day-trading. I like to look for a company that I could hold on for a long time. However, as you have seen, if I do hit a home run, I sell the stock early to take some profits. This works for me because if the investment goes bad, I never lose too much money.
Finally, and this is perhaps THE most important point of everything in this article, is that you should have a solid core before you explore. I can’t emphasize this enough, because I feel like many people are just exploring and hoping to get rich speculating. That can lead to dangerous things like losing half your money in a short time.
Further Reading – Freddy Smidlap writes about his 30-bagger Shopify and gives some of his tips on how to find watch list ideas.