Almost three years ago I told Bristlemouth readers about Three Darling Stocks to Sell.
McMillan Shakespeare was the first of the three, and the concerns have proven well justified. The threat of legislative change to its business model is now permanently factored into its price and the total return over the period was just 7%, versus 25% for the All Ordinaries Accumulation Index.
Next up was Flexigroup and it has fared worse. Senior management departures followed some poor operating results and now the company’s usurious business model is the subject of government inquiries. Shareholders have lost 19% over the period, including their dividend cheques.
Two out of three ain’t bad. Perhaps we should start running a long short fund? Perhaps not.
Those two stocks could have gone to zero and my short portfolio would still have lost money. The third candidate, Blackmores, has returned 326% over the same period. I said sell it at $30 a share and was looking clever for the first 18 months. Today it trades north of $130.
Our Australian Fund has done exceptionally well over that same period, so there’s no need to beat myself up. But there is a lesson or two in getting my call on Blackmores so horribly wrong. The biggest is that it is easy to let your personal biases get in the way of a rational assessment of a business.
Peter Lynch’s One Up on Wall Street was all about using your own everyday experiences to find tomorrow’s stars. It can be a very successful strategy. Any parents using Bellamy’s baby food to feed their young ones could have made a motza from their inside knowledge when the company floated earlier this year (it is since up sevenfold). But such personal experiences and preferences can also cloud your judgement.
Blackmores sells vitamin supplements. It is my view that they are a complete waste of time and money for the vast majority of people who use them. That is also the view of the scientific community and the conclusion of any serious attempt to measure the results. An article in Scientific American, Multivitamins Are a Waste of Money, Doctors Say, quoted the authors of one study summing up the evidence:
“We believe that the case is closed — supplementing the diet of well-nourished adults with most mineral or vitamin supplements has no clear benefit and might even be harmful”
My own personal experience corresponds with the evidence. I can’t remember the last time I had a day off sick, despite many hours spent on planes and in airports, and I manage to get through one or two marathons a year. With the exception of a magnesium tablet to stave of cramps on marathon day, I achieve this without the aid of one supplement tablet.
It was a mistake, however, to assume that this was some sort of flaw in the Blackmores business model. The evidence has been out there for years and it hadn’t stopped Blackmores growing. And they aren’t selling to people like me. Their target market is people who want to be fit and healthy but don’t want to do the exercise or eat a moderately balanced diet. The pills won’t fix your problems, but buying them is like buying lottery tickets; it’s the dream that counts.
Sales and margins have skyrocketed and the share price is up fourfold. Blackmores is one darling stock that had a deserved reputation.
5 thoughts on “Blackmores Dream Kills My Shorts”
I saw your article when it was first published. I also looked into the stock when it was trading around $20. In additional to looking at the financials, I went to a local pharmacy and looked at some of the Blackmores products. In comparison to its rivals, the products I saw were considerably more expensive, without any discernible difference in quality or appearance. On that basis, I figured ‘why should I expect sales to increase materially from here, especially when compared with rivals?’.
I think perhaps the better questions are why have their competitors not had the same success? Is there a substantial gap in the vitamins market? Will competitors start to claw back some of this market?
Interesting case study.
I can see a parallel between Blackmores and Harley-Davidson, one of the latest addition to the International Fund. Both are selling overpriced, under-performing products. But more important than the hardware, they are selling the dream and that’s what counts.
Let’s hope the parallel extends to the share price rise.
unfortunately I remember the article all too well and agreed with the sentiment. At the time Suisse was killing it and so I sold half my holdings. Having said all that, I suspect it now is the time to ditch it for good though perhaps with some of the large share price moves, maybe there’s a takeover coming.
You might want to contact Fairfax, they have reported this as a real short position in their Markets live blog on the 18/09/15
Really nice article, Thanks