In every decade, there are handful of stocks that get a cult following. The company’s earnings, strategy and vision do not support the high valuations and stock prices but yet, these stocks continue to defy gravity. In this report, we examine three companies that had been boosted by cult following and are now likely headed for the dog house.

Tesla (TSLA) – After years of high debts, cash burn and zero profits, Solar City’s acquisition by Tesla, was boon to Solar City investors but a big negative for Tesla’s shareholders. While Tesla’s CEO – Elon Musk highlighted cross-selling opportunities between the two companies to placate Wall Street, the Q4 2016 report of the combined company shows what happens when two companies with negative cash flows come together. With Musk’s prolific capex spending plans that includes boring a hole into the earth to create highways underground, the company will need to raise $3 – $5 billion shortly to keep the company afloat, massively diluting shareholder value. If the company does not rein in its spending, the company itself could be six feet under.

Fitbit (FIT) – When Lance Armstrong got ostracized, his trademark Livestrong yellow wristbands were quickly replaced by Fitbit’s fitness trackers. People could be seen in parks and parking lots alike, walking randomly in circles with seemingly no purpose at all, to fulfill their quota of 10,000 steps a day. But, like most gym memberships, Fitbit users could not see any immediate results and quit. The company that has never achieved profitability now faces poor sales amidst increasing competition from smartwatches that have built in fitness tracking functions. And people are acting sane once again in public places.

GoPro (GPRO) – The idea that anyone needs a standalone camera these days is ludicrous. Somehow, GoPro managed to get a fringe group of enthusiasts to buy their cameras and put them on surfboards, bike helmets, mountain bikes etc. And then, a Chinese manufacturer came in and started to sell the same type of cameras for a lot lower price. So, like most single product companies in consumer electronics, GoPro faces an uphill battle that is likely to go downhill as losses pile up.

Future Wealth’s View

Whether it is a $100,000 electric car that only the richest can afford or a wristband that does nothing more than count your steps, the market has a way of eliminating the crazy dreams and products that CEOs conjure up with little regard for a sustainable business model. In their book “Strategy That Works”, Leinwand and Mainardi argue that highly coherent companies shape their future creating demand based on their privileged access to customers. In Tesla’s case, Solar City was an ill-advised acquisition, when it should be focusing on growing its share in the automobile market with mid-range and driverless cars. Fitbit’s only hope is that will be acquired by another company, albeit a company like Nokia, which is in trouble already,  is likely the best prospect to acquire them. GoPro is another company whose only hope is to be acquired, else it will join Eastman Kodak in bankruptcy courts.

At Future Wealth, we avoid chasing trends and fads and instead invest, for our clients, in sound companies that generate positive cash flows, payout healthy dividends and have a solid business model. Age old wisdom still works today.