The Motley Fool

Two stocks I was dead wrong about and what I have learned

Image source: Getty Images.

For years, Provident Financial (LSE: PFG) was an investor darling thanks to consistent revenue, profit and dividend growth. There was also its leading position in the massive market making loans to relatively under-banked subprime borrowers.

But its tremendous record of growth came to a screeching halt in early 2017 as the bank issued an out-of-the-blue profit warning, leaving bullish investors, like myself, wrong footed. This, of course, is part and parcel of investing, and should be treated as an opportunity to learn where a thesis went wrong and how such an issue can be avoided again in the future.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

For Provident, the issue was management’s move to end its relationship with its army of self-employed agents who covered a certain geographic area where they would have relationships with customers to whom they would extend credit and collect repayments. In their place, management sought to employ a percentage of these workers on an in-house basis and use a new computer system to improve the lending process and lessen regulatory risks from using contract employees.

On the face of it, this move made sense to investors like myself. However, things clearly went wrong when the new computer system proved to be not up to scratch and, more critically, many self-employed agents decided to not come in-house. That left Provident with large areas where no new loans were being made and existing loan repayments weren’t being collected.

What did I learn from this? First off, don’t underestimate the potential effects from any change to a company’s core business, even if it’s one that seems to make sense such as bringing field loan officers in-house.

Second is to make a more concerted effort to listen to what the employees of a firm are saying. In Provident’s case, there were plenty of agents complaining publicly about the changes before management was forced to issue its profit warning.

Competitive issues 

Another stock I was very wrong about was Safestyle UK (LSE: SFE), a large PVC window and door replacement manufacturer and retailer. The company’s first few years as a public entity went smoothly as it reported consistent sales and profit growth on the back of growing share of its highly fragmented market.

But this came to an abrupt halt last year with a shock profit warning. That turned out to be down to a rival operation setting up shop in Safestyle’s own backyard with a similar business model, branding and even many former employees.

What did I get wrong here? Well, the big problem was overestimating just how much of a moat Safestyle had to ward off competitors. The new competitor proved adept at producing and selling its products at a similar price point to Safestyle, which I had thought highly unlikely given the company’s vertically integrated business model.

There were several important lessons learned from this one. Ensure as much as possible a company’s competitive advantage is deep and lasting; pay closer attention to whether customer decisions are driven more by price or quality; and to take a look at a sector’s history, which could have tipped me off to previous problems in Safestyle’s market. 

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Ian Pierce 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.