Stamps.com was a major winner during the momentum-fueled market that has dominated since 2013. The stock was among the 20 best performers in the Russell 3000 Index (top 3,000 U.S. companies ranked by market capitalization) when it hit an all-time high in June of last year. Today, shareholders are likely weeping. The stock is indicated to open at $44.50—a 50% haircut from yesterday and a portfolio-decimating 84% below its high of last year.
Turns out Stamps.com’s business was pretty reliant on some exclusive contracts with the U.S. Postal Service that were terminated earlier this year. We don’t follow Stamps.com, but these risks appeared to be disclosed in the company’s annual SEC filings.
Who bid the shares up to such lofty levels when these risks were disclosed?
The same type of folks who thought it was a good idea to take a no-money down interest only mortgage in 2006 to buy a house they couldn’t afford. Or the “investors” who put half their portfolio in bitcoin without even knowing what it was simply because the price was going up.
There are never any guarantees in investing, but how might a prudent investor reduce the chances of a Stamps.com type of debacle? Here are some ideas:
- Don’t worry about what other investors are doing or how other assets are performing. You don’t have to have a license to invest money. Plenty of investors make questionable decisions every day and sometimes those decisions are made by herds of investors. Financial market history is filled with logic defying manias.
- Risk comes in many forms. Make up your own mind on what risks you are willing to take. Who cares if the risk never materializes. That doesn’t mean it wasn’t a risk worth avoiding. Wall Street apparently thought the risk of Stamps.com’s USPS contract terminating was remote. They were wrong.
- Diversification is essential. Even the share prices of blue-chip firms can fall much farther and faster than one might expect. Proper diversification can help you blunt the impact of major losses on a single security.
Bloomberg has more on Stamps.com situation.
Stamps.com Inc. plunged 48% in pre-market trading Thursday, poised to drop to a five-year low, after the company slashed its profit outlook for the full year, fueling investor concerns about its ability to protect margins in the absence of a key partnership with the U.S. Postal Service.
The company, which makes software that lets customers print postage for U.S. mail, had set its earnings forecast for the year in February, when it reported fourth-quarter results and also said it had ended the USPS partnership. While it expected the discontinuation to result in some “short term pain,” the latest outlook suggested that pain may be more severe than anticipated.
Stamps said the lowered guidance mainly reflected potential unfavorable short- and long term amendments, re-negotiations and termination of certain contracts between the USPS and the company’s partners who are part of the USPS’s reseller program. “It appears the USPS is now negotiating with multiple resellers for lower rates, which would negatively impact Stamps’ reseller revenues,” Northland Capital Markets analyst Tim Klasell wrote in a note to clients. He downgraded his rating on the stock to market perform from outperform.
Jeremy Jones, CFA
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