Take a look at this chart…
It’s not a stock price chart.
It actually shows the steady and massive growth in one particular sector.
I mean, just look at it.
Who wouldn’t want to get in on high and consistent growth like that?
Well, that’s exactly what we thinking a few months ago.
And it turned out to be an invaluable learning opportunity which -- if you read the following story fully -- will make or break your financial future when the bear market begins.
Something Most Investors Will Never Tell You
That chart is of annualized auto sales from 2009 through today.
During the credit crisis in 2008, auto sales nosedived.
They fell to a rate of less than 10 million per year - a level not seen since the height of the recession in the early 1980s.
That drop in sales sent the major automakers into bankruptcy.
Since then, however, auto sales have steadily ratcheted higher.
Today they’re back up to about 17 million a year.
And looking at the increasingly loose credit terms and population growth, they have a very real shot at passing 20 million before this emerging bubble implodes again.
That, to me, represents a big opportunity. But only for careful investors.
At this stage in the auto sales cycle, the obvious plays have already made their runs. Ford (F) come quickly to mind as an example. It ran hard from $2 to $15 or so between 2009 and 2011. It’s still there four years later.
The big automakers are dead money right now and rightfully so. There isn’t much upside from here and a small drop in auto sales -- as little as 5% or 10% -- would cause those stocks to collapse again.
Still, with the kind of growth in sales and technological innovations shaking up every industry, there must be an opportunity.
We thought we found the perfect company to ride the final stages of the auto sales boom in TrueCar (TRUE).
TrueCar is a lead generation company for auto sales. It’s a middleman between car buyers and sellers.
It provides prospective car buyers details on prices others have paid in the areas to help car buyers save a little money and make the whole process less painful.
It provides the dealerships with leads which are ready to buy, preset built in margins, and only charges the dealership on average between $300 and $400 for each sale which is a fraction of the usual profit on a sale.
It’s a win/win for customer and dealer. And with $70 million in fresh capital it raised from IPO, TrueCar could really be a major player in the auto sales business.
It has worked out exceptionally well too. Last quarter TrueCar was involved in 70,000 auto sales, up 60% from the same period a year ago.
But as always, a great company and a great stock aren’t always the same.
TrueCar was recommended to Advanced Wealth Letter readers as a backdoor way to get into the auto sales boom last year at around $19 per share. It went on to a high of $25 and still had a lot more potential.
I thought it was a great opportunity for all the reasons above and many more.
But, there was a problem. A big problem.
TrueCar wasn’t able to live up to the market’s lofty expectations.
Sure, it was growing at a great rate and had huge potential, but it didn’t work out.
The results since then have been disastrous:
TrueCar shares have fallen from a high of around $25 per share to just above $6 today.
In all, that’s a near 75% decline in just six months.
To recover, TrueCar would have to rise 300% from here. A very low-probability proposition.
But here’s the thing.
We’re not in that situation at all.
We set a hard stop-loss point at $15 per share when I took over.
Regrettably, that stop-loss was hit and I sent this note to Advanced Wealth Letter readers in May:
Although [TrueCar] is below from its recommended price, I have no worries about letting it go.
The company recently released its quarterly results last week and they just weren’t good enough.
The company said it reported it was involved in 168,559 transactions last quarter. That’s a 34% increase involved in about 6% of all auto sales in the country.
The company also said it expects revenues to grow from a little more than $200 million this year to $280 million to $290 million over the next year.
The company is living up to its potential. But there’s a problem. There are still a lot of risks for this company. Any of which could lead to an even greater drop in share prices.
Those greater risks came into play last month TrueCar said it’s growth was slowing and TrueCar was hammered down to where it is today.
Losses You Can Live With
All in all, I’m not happy about the trade.
It was a loser.
There’s no getting around that.
I know few investors will ever tell you about their losers. But we all have them. And we all will have more of them.
The real key to success when a stock goes against you is keeping your losses manageable.
This loss was a manageable loss. Not a catastrophic one.
So at this point, we need to find a 30% winner to make up for it. That’s doable.
If we had not cut our losses early, we would need a 300% return just to get back to even. Not a position anyone wants to be in.
If you can learn anything from this, it’s that you should look for the big opportunities growth can provide, but if a stock moves against you, the keep your losses small.
You’ll be able to recover quickly and you get back to building wealth as soon as possible and that will be spectacularly important when the next bear market begins.