tesla, fitbit, and what happens when wall street forgets a fad is a fad

As I highlight in the introduction of my book Dead Companies Walking, retired New York money manager David Rocker once wrote that there are three types of shorts:  fads, frauds and failures. I generally focus on the latter of the three by seeking out and shorting troubled companies that could soon go broke. Shorting fads, on the other hand, is tricky. Timing is everything, and predicting exactly when a fad fizzles out is almost impossible. Remember “Pogs,” those weird little toy discs that kids briefly went nuts for a while back? It seems unbelievable in retrospect, but two Pog-related companies came public during that mania. Both went bankrupt soon after the craze subsided, but if you’d shorted either of them beforehand, you would have needed some serious intestinal fortitude to stay in the position.

The trickiest fad businesses to short are the ones that grow so popular in such a short time, even seasoned investors become convinced they will turn evergreen. This is particularly true for products that are popular among financial workers and the broader investor class. After all, if the folks buying, selling and analyzing stocks love a company’s products, they’re more likely to overestimate its value and its longevity. As I write in my book, an analyst at a prestigious brokerage once swore to me that there would soon be ten times as many rollerbladers as bicyclists. Before I hung up the phone and shorted the stock of the second largest inline-skate maker at the time, she happily informed me that she and many of her colleagues were avid rollerbladers.

The two biggest “stealth fad” stocks in today’s market could very well be Fitbit (FIT) and Tesla (TSLA). Neither is likely to go the way of Pogs or rollerblades, at least anytime soon. But, like rollerblades, they’ve both benefited from their excessive popularity among the very people buying and analyzing their stocks.

Fitbit’s watches retail for $99 to $250 and do more or less the same thing as a $10 pedometer; that is, provide semi-accurate information on one’s heart rate, daily steps, and calories burned. Like a lot of health and fitness-related products, the devices are extremely well-liked in the financial and investment community. I see a lot of folks in my business sporting the expensive plastic baubles on their wrists, which leads me to suspect that many of those same people are overlooking the daunting challenges the company faces. Many consumers reportedly stop using their Fitbits shortly after buying them, and it’s far from the only player in the space. Walk into any sporting goods store and you will see scores of similar tracking devices made by established companies like Garmin. Fitbit’s management will surely design new models, but so will these competitors. That means, even if the fitness-tracking boom persists for years to come (a very big if) Fitbit could still struggle to maintain its growth.

Then there’s Tesla. Rich guys who trade and study stocks absolutely adore its products. You can’t leave your driveway here in the Bay Area without swerving to avoid a speeding Model S. But that ubiquity—as with so many other products that sell well in San Francisco and Silicon Valley—does not extend to so-called “flyover country.” Tesla will sell over 50,000 cars in 2015, all 100 percent electric powered. That’s not bad, but it still only makes the company a niche player in the overall automotive market, and–like Fitbit–Tesla faces stiff competition from well-capitalized competitors. Perhaps the riskiest thing for fad, or fad-like products is the inevitable arrival of a newer, cooler fad–or a newer, better product. Toyota is set to debut its Mirai fuel cell vehicle. Who knows? Maybe it will become the new “it” car for upscale, green-minded buyers.

Even though Fitbit and Tesla both got hammered post-earnings yesterday–and both still trade for over 10x last year’s revenues–I may never short either company. However, I recently bought a stock that should benefit from another fading fad in a big way. Six months ago, Brisbane, California’s Cutera (CUTR) gained government approval for its “Enlighten” tattoo removal laser. This could be a huge industry. Roughly 25 percent of Americans aged 25-40 have tattoos now, and almost half report that they would like to get rid of them. Before Cutera’s product, that would have been a prolonged, painful, and expensive ordeal. Not anymore. The Enlighten laser requires fewer doctor visits and doesn’t hurt as much as existing procedures. Cutera‘s current market capitalization is roughly $200 million, vs. 2014 revenues of $78 million. Revenues could grow 20 percent in 2015, and the company should become profitable by the second half of the year.

Like stocks, fads have a tendency to crash hard when their momentum stalls. I might short Tesla and Fitbit if they continue to suffer major sell-offs like they did after yesterday’s close. In the meantime, though, Cutera seems like the best way to profit on the only fad that never seems to go out of style: consumers changing their minds.


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