Chart of the Day – Switching Gears: $GRMN, $GPRO

by Enis September 3, 2014 12:20 pm • Commentary

GoPro’s IPO has taken all of the sizzle out of Garmin’s shift to wearables.  In fact, the IPO of GPRO on June 26th took place within one week of Garmin’s peak so far in 2014, which occurred on July 3rd at $62.05:

GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

GRMN retested the early July high (in red) on the morning after the late July earnings report, but quickly sold off on heavy volume in that session.  The stock has not recovered, and has been testing its 200 day moving average for the first time in the past year.

Meanwhile, GPRO has more than doubled since late June, with new highs once again this morning, and three straight gaps after the stock’s break above $50 last week:

GPRO daily chart, courtesy of Bloomberg
GPRO daily chart, courtesy of Bloomberg

GPRO is a difficult-to-value stock that is highly speculative and has 30% short interest with a big momentum following.  But if investors are looking to invest in the wearables market as a whole, and anticipating growth in that sector, then GPRO is likely the preferred investment vehicle vs. GRMN.  At the least, the fact that GRMN’s high coincided with GPRO’s IPO likely has to do with investment dollars moving out of Garmin and getting put to work in GPRO.

I wrote about my own bearish view on GRMN in a trade post in late April:

In short, GRMN’s strategy is to replace its legacy, bread and butter GPS business with numerous hardware products looks like a desperate strategy to keep revenues and earnings from falling.  Meanwhile, the stock’s ascent must be quite reassuring to management, as it seems that Wall Street has bought the strategic plan.  But from my viewpoint, 25 different hardware products competing with myriad competitors is a much less attractive long-term business model than 1 killer GPS application that was the dominant force in its market segment.

The stock’s rise in the past 2 years has been entirely due to an increased P/E multiple, since earnings have been flat.  Market participants’ increased optimism seems misplaced to me.  So we’re bearish on GRMN stock, but what’s the trade?

While GRMN is indeed a few percent lower since that post, my timing and trade structure were off, and my trade was a loser.  But my overall view still stands that GRMN is a poor investment from a risk/reward standpoint, with numerous obstacles standing in the way of long-term, sustainable profitability.

GRMN’s weak price action over the last 2 months could be a warning sign to investors in other sectors that face the possibility of money rotating to new darlings.

For instance, fundamentally weak Chinese internet stocks could be vulnerable as the massive Alibaba IPO looms.  Investors could be once again start moving funds out of the weaker names in the sector in order to buy the kingpin, for better or for worse.