You can make decent money on Wall Street by sticking to consensus logic, the trades that just about everyone agrees make sense. But the trades you remember are the ones that fly in the face of popular opinion.
I’m talking about the contrarian postures where you see just about everyone in the market pointing in one direction . . . but you know in your heart that they’re wrong.
That’s where you can make real money. And you only need to look to Affirm Holdings (AFRM) today to get a sense of how fast the money can move when you bet against the crowd.
My IPO Edge subscribers can tell you how good it felt to see AFRM soar as much as 37% today. They were already in the stock two weeks ago. Here they are, with a healthy profit.
And for at least one day, they knew how it felt to own the best-performing large-cap stock on Wall Street. Big money was dead wrong on this company and realized that mistake when earnings came out.
Big money had to move fast to catch up. As a result, while a few relatively small stocks did better, AFRM ran literal rings around everything else in its weight class. The next-biggest surge today in multi-billion-dollar territory didn’t even turn into a 15% gain.
All the trillion-dollar giants, meanwhile, lost ground . . . except for Facebook (FB), the newest and smallest of the group. AFRM racked up a higher percentage return today than mighty AAPL has produced in the past year.
Conviction Versus The Calendar
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But one day doesn’t make a long trend. AFRM has only been public since January, when it promptly jumped from $45 to $90 in its first day. After the first month, however, upside became elusive.
We were in the stock briefly but bailed out when it became clear that Wall Street just wasn’t in the mood to get it. I still loved the company. The business was growing fast.
But there was no sense in hanging on in a stock that amounted to dead money until we could see the light of recognition in other investors’ eyes. We came back two weeks ago when that light finally flashed.
What does AFRM do? If you’ve done any online shopping lately, you’ve probably seen the “buy now, pay later” installment plan buttons on the cart.
That’s the business model here. AFRM doesn’t charge interest on the transactions it facilitates, so it’s attractive to shoppers who might not have the cash right away but don’t want to pay credit card fees.
Instead, the retailer sells the transaction to AFRM at a discount. They get the money right away and book the sale. Collecting the money then becomes AFRM’s problem.
Wall Street thought that was a big problem. People assumed competitors like PayPal (PYPL) or Square (SQ) or even a giant like Apple (AAPL) would step in and take these transactions for themselves . . . or at least wreck the margins in the business by paying too much for market share.
We stayed on the sidelines for months. There’s no sense staying contrarian when there’s absolutely no sign that the crowd is coming your way.
To paraphrase the old saying, you can be right for a long time, but the market can stay wrong longer than you can remain patient (or solvent).
But two weeks ago, AFRM announced a deal with a little company called Amazon.com. Yes, AMZN was giving up on its own efforts to structure its own “pay later” sales. They recognized that AFRM did it better.
And Wall Street started paying attention. We came back. I knew there was upside . . . after all, this was a $140 stock in the initial post-IPO glow, so the historical record was on our side.
All we needed was that light of recognition to finally flash. Two weeks later, earnings proved that us contrarians and early birds were right after all.
AFRM doubled its merchandise volume over the past year. Revenue is up 70% and while the company is a long way from profitability, operating margins are positive at this scale and can only get better as Amazon starts feeding sales into the system.
For the coming year, revenue is only tracking $10 million above consensus, but that’s enough to prove that the bulls had the right idea . . . and we were even a little too modest with our expectations.
The bears, meanwhile, had committed to buy a full 8% of the stock and now need to cover themselves in a hurry. I’m thrilled.
The Moral Is Clear
It’s been a tough year for IPO investors. Our average exit on IPO Edge has dropped to “only” 33% in about seven months per position and our current holdings are currently only a few percentage points ahead of the Renaissance IPO Index, the benchmark for these young stocks at the start of their Wall Street trajectory.
But we buy most of our names before Wall Street catches on . . . and then we hang onto them as long as we can justify our patience. Of course, if they soar right out of the gate, I won’t complain.
We’ve booked six 100-260% wins there in the past 12 months. And stocks like AFRM show that there’s more ahead.
All we need is the insight to see where the market is wrong and the courage to resist the urge to give up . . . unless it’s absolutely necessary. Even then, we can simply put our money to work elsewhere while we wait for the mood to improve.