Successful investing is as much about avoiding duds or taking on too much risk as it is picking winners. It’s why Warren Buffett and his business partner Charlie Munger are two of the wealthiest individuals on the planet.
As the latter once remarked: “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.“
Today, I’m going to focus on two UK growth stocks that, thanks to the ‘Sage of Omaha’ and his colleague’s advice, I thankfully never fancied and still don’t.
70% down!
I was sceptical about global review platform Trustpilot (LSE: TRST) when I first looked at it last September. At the time, the share price had soared 70% or so since its IPO earlier in the year.
Despite such impressive gains, I just couldn’t shake the feeling that it lacked an ‘economic moat‘. This is a term coined by Buffett to describe a business with sufficient competitive advantages to consistently fight off rivals. Might it be possible to copy what Trustpilot has done with sufficient capital and eventually steal its crown? I believe it is.
But this wasn’t the only red flag for me. As well as being concerned about the potential for Trustpilot’s review system to be abused by bad actors, I was wary that the company was not making a penny in profit.
Since then, the shares in this growth stock have tumbled almost 70%!
Trustpilot isn’t without promise. Back in January, the company announced it expected FY21 annual recurring revenue to hit $144m. That’s a sizeable jump from the $119m achieved in the previous year. Based on this, investors might suggest the stock is a potentially lucrative contrarian pick.
With the rotation into value showing no sign of abating just yet, however, the outlook for the share price looks pretty bleak. Like Warren Buffett, I’d prefer to stick to proven quality stocks rather than take on the additional risk here.
Another struggling growth stock
A second company I’m steering clear of is furnishings and homewares retailer Made.com (LSE: MADE). Just the fact that I’ve never looked at this growth stock until now speaks volumes.
While investors in Trustpilot enjoyed early gains, anyone backing this other relatively new stock will only have seen their stake sink in value. From a 52-week high of 214p, Made.com’s shares are now languishing at 73p a pop.
Again, the lack of economic moat strikes again. With so much competition, is there anything that will compel me to only shop with Made? Not at all. Contrast this with Buffett’s huge holding in Coca-Cola. The owns so much of the beverage titan because he knows a lot of people refuse to drink any other brand. This advantage arguably makes it far less risky.
On top of this, the rise in the cost of living can’t be good for business. The boom in home improvement we’ve seen since the pandemic arguably peaked long ago too. Yesterday’s news that CEO Philippe Chainieux is stepping down is another unfortunate development.
With a market-cap now below £300m, perhaps the fall has been overdone. The website certainly looks slick and Made appears savvy when it comes to social media. For me however, this mostly presents as another unprofitable story stock that was opportunistically listed.
The post I’m listening to Warren Buffett and avoiding these growth stocks like the plague! appeared first on The Motley Fool UK.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
