Fighting the Knee-Jerk Reaction: 3 Companies That Are Down But Not Out

This article was first published by MyWallSt.

Warren Buffett once invested in an oil-service company called Cities Service. He'd studied the financials, done his homework, and was certain that he'd found an undervalued gem. He bought the shares at $38 — just before they plummeted 30%.

The shares eventually rebounded and Buffett decided to get out at $40 a share, making a $2 profit on his original investment. Unfortunately, he then had to watch as Cities Service shares rocketed to $200 without him. He was only 11 years old at the time but had learned what would probably be the most important lesson in his investing life.

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Years later, Buffett's business partner Charlie Munger said, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent."

Whatever You Do, Do Nothing

As an investor, it's important to remember that sometimes the best thing you can do is absolutely nothing. The number one rule of investing has always been to buy low and sell high, yet a lot of investors end up doing the complete opposite.

When the market opens in the red, the natural reaction is to panic, sell off your stocks, and cut your losses. To be a successful investor, however, you have to fight that instinct. No matter how good you are at picking stocks, you'll never create long-term wealth if you sell in a downturn.

You must accept down days are inevitable. Everyone's a good investor when the market is going up day after day, but it's your response to the pullbacks that separates you from the herd. So how you avoid the knee-jerk reaction that gets many investors in trouble?

Buy what you know, and buy what you believe in.

A Tale of Three Companies

There are three companies that stick out when thinking about fighting the knee-jerk reaction. Two are still in the red and one has made a miraculous comeback, but the reason we are able to hold on to all of them is a fundamental belief in the long-term vision of the company that outweighs short-term worries.

Under Armour (NYSE: UAA) was one of the first additions to the MyWallSt app and a big winner initially. However, a series of management missteps over the next few years drove the stock price down about 75% from all-time highs at one point — a drop that would have tested the resolve of even the most hardened investors.

Under Armour has since recovered more than 115% and, while not out of the woods yet by any means, is certainly no dead duck either. Though still beset by branding troubles among younger demographics and disappointing domestic sales, international revenue grew reasonably well at 12% to hit $328 million in the last quarter. International revenue now represents 27% of the company's total revenue, with sales in the Asia-Pacific region up 25% specifically.

Notably, the company also managed to end the last quarter with its inventory reduced by 24%, reflecting a positive turnaround for a problem that had long beset the company. As CEO Kevin Plank said on the earnings call, "We're just running a better play, period."

Another company that went on a more recent white-knuckle drop was Eventbrite (NYSE: EB), the event management and ticketing company. Stock jumped by more than 60% on the company's first day of trading back in September 2018 but, since then, has declined steadily and is currently sitting more than 55% off all-time highs.

One big influence on this drop was the company's prolonged struggles with integrating Ticketfly into its native platform. After buying the company way back in 2017, Eventbrite chose to merge the platforms rather than operate Ticketfly independently.

However, this "requires an intensive process where our team focuses on migrating existing customers as well as building platform enhancements," CEO Julia Hartz said on the company's earnings conference call, leading the company to project revenue of between $80 million and $84 million for the current quarter — far short of the $91 million.

Still, we believe that Eventbrite has carved out a blue ocean opportunity for themselves by focusing on the events that LiveNation's (NYSE: LYV) TicketMaster have deemed too small to bother with. Eventbrite issued 4.6 billion revenue-generating tickets in 2018 and, going forward, such short-term road bumps will seem insignificant.

There was a time not so long ago when Chipotle Mexican Grill (NYSE: CMG) looked like the worst investment around. From peak to trough, shares in the restaurant chain fell more than 65% over the course of two and a half years thanks to multiple outbreaks of e.coli norovirus at various outlets.

Enter new CEO, Brian Niccol. Since taking over the reins from founder Steve Ells early last year, the former Taco Bell CEO has completely turned the company's fortunes around. Niccol was instrumental in helping Taco Bell to roll out digital capabilities across 7,000 of its U.S. outlets and he has adopted the same approach with Chipotle, with digital sales growing 100.7% year-over-year in the last quarter and accounting for 15.7% of overall sales. He's also managing to get customers back in through the doors, with comparable restaurant sales increasing an impressive 9.9% in the last quarter.

Thanks to Niccol's redirection, Chipotle stock is now close to all-time highs again, with shares up more than 66% from the start of this year. Proof, if needed, that just because a company is down, it's certainly not out.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Chipotle Mexican Grill, Eventbrite, and Under Armour.

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The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Live Nation Entertainment, and Under Armour (A Shares). The Motley Fool has a disclosure policy.