We leverage our Robo-Analyst technology to monitor 3,000 stocks across all sectors and issue Danger Zone reports to help clients avoid portfolio blowups. Position Update reports serve as notification that a previous investment idea’s risk/reward profile has shifted and the position has been “closed”.
Shutterstock (SSTK: $33/share) – Closing Short Position – Down 41% vs. S&P +12%
Shutterstock was selected as a Danger Zone pick on August 1, 2016. At the time of the report, the stock received an Unattractive rating. Our investment thesis highlighted: 1) a negative divergence between revenues and economic earnings; 2) the use of misleading non-GAAP metrics; 3) low NOPAT margins relative to competitors; and 4) unrealistically high expectations baked into the stock price.
During the subsequent 375 day holding period, SSTK outperformed as a short position, falling 41% compared to a 12% gain for the S&P 500. The position went against us by 15% out of the gate, but a disappointing 3Q16 earnings report in early November sent the stock down over 20%. Earnings disappointed again in February, and most recently in August, sending the stock down a total of 31% YTD.
Figure 1: SSTK Stock Price and Risk/Reward Rating History
Sources: New Constructs, LLC and company filings
Since our original Danger Zone report, SSTK has been upgraded in our system to Neutral from Unattractive according to our Stock Rating Methodology. The significant reduction in stock price and embedded market expectations diminishes the downside risk and we are closing the position. We hope investors avoided this portfolio blowup or participated in the 41% short return.
This article originally published on August 14, 2017.
Disclosure: David Trainer, Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, style, or theme.