The Two Tricks to Building Wealth with Stocks

You’ll keep the losers out of your home-run portfolio…

Everyone wants to find that one stock they can get rich and retire on. It's the dream, and it's fun to fantasize about.

However, the reality is that you're as likely to find "the one" as you are the Holy Grail.

That doesn't mean you shouldn't try. You absolutely should… just not in the way people think.

Not only is it fun trying to find "the one" stock that's going to make you rich, it can also be very fruitful.

Chances are you're not going to find "the one," but that shouldn't stop you from building a portfolio of strong contenders. Your millionaire-maker might very well be in there, but even if it isn't, you can still hit it out of the park with a solid portfolio of 10 or 20 winners.

While it's obviously important to have winners in your portfolio, what's talked about far less is how to avoid losers.

If you can avoid dead weight, your chances of building a monster portfolio are far greater than you ever imagined…

Blue Apron's Red Flag

The two "tricks" to building wealth through a stock portfolio are:

  1. Buy stocks that have a wide audience for their products, preferably an audience/customer base that will keep growing.
  2. As your stocks are going up, add to them. Buy more shares (yes, at higher prices) and reinvest your dividends (if the company pays dividends) back into more shares of your winners.

Of course, if you pick losers, you're never going to build any wealth. In fact, you'll probably throw in the towel and miss playing a game that you could win big time.

One of the ways everyone thinks is the road to riches is to get into the next hot IPO and ride that cheap stock to the moon. That can work.

But if you're going to chase IPOs, you need to know what to avoid or when it's time to bail.

Blue Apron Inc. (NYSE: APRN), which IPO'd on June 28, is a good example of what not to buy.

The meal-kit delivery company was originally supposed to be priced in the high teens.

Underwriters had to ratchet down, again and again, to what price they'd bring the stock out at.

That's always something to look at. You want to know why the underwriters, who stand to make more money on a higher-priced IPO that goes up than on an IPO they have to price down and support, are knocking the price down. There's always a reason, and sometimes a few.

The debut price begins to fall when the underwriters are calling their clients and asking how much stock they want to buy at the initial price, and clients aren't biting.

Blue Apron stock got priced at $10 for its debut, considerably below expectations.

One big reason was that rumors were circulating that APRN had asked for more credit before going public, but its backers decided it was too risky and left it hanging.

Like I said in my article a few weeks ago about Blue Apron's IPO: "Apparently, going public was a necessity."

The company's IPO prospectus said " believes its cash and borrowing capacity will be sufficient for at least a year. If the company becomes strapped for cash, it may increase its borrowing capacity under a revolving credit facility or raise additional funds through equity or debt financing arrangements."

That circulating rumor knocked the initial price down. But so did the news that Inc. (Nasdaq: AMZN) was buying Whole Foods, which signaled Amazon's aggressive move into food. And wherever Amazon sits at a table, everyone else goes hungry.

Blue Apron was finally priced at $10, giving it a market value of $1.9 billion. Pretty big, but not nearly the $3.2 billion initially talked about.

All that's a big red flag for IPO investors. If institutional buyers don't want the stock (and trust that they've been pitched the hard facts and figures), you probably don't want it either.

The Difference Between a Winner and a Wannabe

The No. 1 attribute a good company has going for it is a wide audience for its products, a command of the space it's in, and the potential to grow its customer base and market share.

Coming to market, Blue Apron was the biggest meal-kit company in the United States.

When your business is delivering prepackaged ingredients and recipes to subscribers' doorsteps for them to prepare at home, you better have happy subscribers. There's a lot of competition out there, especially from restaurants.

About those customers...

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According to a survey of 45,000 meal-kit subscribers by Cardlytics in 2016, after one month, the retention rate was only 77%. After six months, the retention rate dropped to 48%. And after one year, only 29% of subscribers were still on board.

So much for building on its subscriber base.

The stock's been a loser since it came out. It's exactly the kind of stock that you don't want to park in your dream-catcher portfolio.

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Then again, some people might look at Facebook's IPO and how it tanked and has since skyrocketed. They might then look at APRN and think it's cheap and a buy down here, some 35% below where it came out.

In fact, some of those people are Wall Street analysts.

RBC Capital Markets analyst Mark Mahaney recently said, "We believe Blue Apron is addressing a large, multibillion-dollar market that is nearly all offline and taking spend away from both traditional grocers and restaurants."

Analyst Michael Graham of Canaccord Genuity said, "Competitive moves from Amazon and investor concerns around customer retention have put significant pressure on the stock both before and after IPO pricing. We believe this has created a bargain opportunity."

But with the stock below $6.50, five out of 11 analysts who initiated coverage recently warned that Blue Apron shares shouldn't be valued at more than $10. Some of those same analysts saying that were underwriters of the IPO.

I knocked APRN stock in my July article because it makes no sense to me.

You're going to make money by putting proven winners in your portfolio, not wannabes.

Betting that APRN is the next FB is a fantasy. Sure, it could pop. It popped 20% when analysts touted it last week, but then it came right back down.

Blue Apron is a gambler's stock. If you want to hit home runs, you can't gamble on wannabes until you're blue in the face.

Urgent: These big-name companies are already knee-deep in a pool of quicksand… There's nothing you can do to save them. But what you can do is learn how to cash in big from their unstoppable downfall. If you don't, someone else will. Learn more

The post How to Keep Loser Stocks Out of Your Home-Run Portfolio appeared first on Wall Street Insights & Indictments.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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