Berko: Sandwich stock not appetizing




Dear Mr. Berko: In October 2013, I bought 300 shares of a restaurant stock called Potbelly Sandwich Works at $31, as it was profiled on several of the TV financial news programs. What happened to this company? It’s now $11.87. How could it have gone up so fast, and how did it go down even faster? What am I missing here? Please tell me whether I should buy more shares of Potbelly or sell and take a big loss. I think the company has a good product and a clever restaurant theme, and I have even eaten at two of its locations in Minneapolis. I would appreciate your quickest answer, please. How could I have made such a stupid mistake? Can this stock return to my purchase price?

— LT, Minneapolis

Dear LT: You listened to the talking heads on television. You don’t have to be knowledgeable or smart in a bull market. And these TV folks are not paid to be knowledgeable or smart; they’re paid to be telegenic and enthusiastic.

In January of this year, when Potbelly Sandwich Works (PBPB) was trading at $23, I told a reader that PBPB was an “obscene investment,” and today it’s $11.87! It’s hard to believe there are that many stupid investors out there with enough cash to push the shares of PBPB from its initial public offering price of $14 to $33. However, my incredulity has given way to exasperation because so much easy, excitable and cheap money was chasing this stock. I underestimated the influence of the financial media (Fox Business, MSNBC, Bloomberg TV and CNBC) that beam their visions of financial utopia and bullish forecasts to ignorant and admiring audiences. Because these broadcasters have to fill 24 hours of daily programming with paid advertising, they’ve necessarily become enthusiastic cheerleaders for all kinds of commissionable products with a story to tell. Their reports segue into pro forma “buy” recommendations, and their stories are scripted to pitch the stocks on which they report. (Where are the regulators?) Have you ever heard Jim Cramer, Tom Keene, Sara Eisen or Maria Bartiromo offering a “sell” opinion? Because it’s nearly impossible to be wrong in a bull market, financial broadcasters have enjoyed immense popularity.

In October of last year, Goldman Sachs and Merrill Lynch, two architects that control the financial media, took PBPB public with sufficient circus to give this “sweet” $300 million-revenue company with no earnings a market value of $1 billion. Their 29 million-share Potbelly underwriting was hugely oversubscribed at $14. It zoomed to $33 because thousands of stupids believed that PBPB would franchise a zillion new locations and that huge revenue and earnings gains would follow. Within a few months, the stupids discovered that this cute little company, which sells good food at a fair price with a unique restaurant theme, is just one of many thousands of cutsie little competitors selling good food at fair prices with clever restaurant themes. So the shares began to drift downward. Management issued rosy sales forecasts and bright earnings forecasts, but the stock continued drifting lower. When it became clear those forecasts were more optimistic than realistic, PBPB’s share price couldn’t gain purchase. But from November 2013 through July 2014 — as shares continued to founder — where was the selling advice from CNBC, Keene, Merrill Lynch, MSNBC and Goldman Sachs?

Here’s my take. Management issued strong revenue and earnings forecasts last February, and six months later, PBPB missed the numbers by double digits. This suggests that management is shamefully uninformed, that it lacks the capacity to grow its revenues in a competitive market and that it lacks the skill set to increase earnings. Or this suggests that PBPB’s ambiance, prices, waitstaff and food quality are not attractive enough to encourage repeat or new customers. Either way, PBPB looks like a downer, and except for an occasional speculative flurry in their price, PBPB’s shares are headed slowly lower.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or