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How To Play The Fad

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Investors know that when a fad hits, it’s time to buy the stock. It doesn't matter if the fad is a food, a shoe or a toy. The maker of the item or service is going to see its stock skyrocket. Let’s take a look at some fads from the past and see what we can learn about them as we look to some current fads.

Homer Simpson Approves

I know we are talking about something that happened 13 years ago, but can you remember back to the days of the Krispy Kreme (KKD) fad. This fad is a little different than most. I mean the doughnut has been around for decades, so a slightly new spin on how you glaze them shouldn't send your stock from $18 to $40 in a few months.

KKD wasn't really about the donuts so much as it was all about the idea of supply and demand. The demand is the part of the equation that drives the insanity of a fad. In the case of KKD we saw huge demand for something that had a small supply. The scarcity of the product seemed to push demand even higher!

What ruined the story was more about the expansion of the company than the donuts themselves. In order to keep a fad alive, there has to be an element of scarcity. KKD satiated the demand for the donuts by moving sales from a few special locations to selling donuts at nearly every gas station and grocery store.

Read The Chart

Here is the chart of KKD from back in the day:

What is the first thing that jumps out at you? Is it that the stock moved up about 150% in the course of one year? That is something that I saw on the longer time horizon graph, but what caught my eye was the two 2-1 splits the company did.

So not only did the company satiate the demand for donuts, they also satiated the demand for their stock. Even though the stock moved to $45 by the end of the year, that would basically be the high water mark for the stock.

Tie In To Today

There is an existing fad, maybe one you cannot invest in, but a fad nonetheless. The Cronut is a combination of the doughnuts and croissant. I hear it is wonderful… but there is no doubt that it is a fad. It will be interesting to see what the maker of the Cronut does, while they follow the path of KKD and make their spin on the doughnut available in every gas station? Maybe they keep control of the distribution and charge an ever rising price. Either, history contains its lessons.

Competition In Fads

About two years ago a company that makes headphones came public. At that time, $20 ear buds were the headphones of choice for the majority of people. The only problem was that the advancement made was a small rubber extension on the bud that delivered the improvements in sound. This is not a defensible addition.

It wasn't long after that happened we saw a resurgence in headphone technology and design. New over the ear phones were being developed and prices were moving up fast.

Fast forward to today and we have Apple (AAPL - Free Report) buying Beats Music for $3 billion. Even though all of that deal is not about the headphones, it certainly started on the idea of high quality headphones, and it has grown to become a fad.

The question becomes if SkullCandy (SKUL) can resurrect its product line and begin to sell more the high cost / high margin headphones to its installed customer base that appreciated the Ink line that was released a few years ago.

The competition in this fad of headphones is rather intense, and making the super expensive headphones relatively inexpensive will require a large amount of R&D. Either way, this fad looks to have legs for another 6-18 months before people start questioning what kind of utility comes a $500 set of headphones that they cannot get from a $50 or $100 headphone set.

Not there is any one perfect play on a fad, but SKUL certainly has a chance to cash in big if they can get the quality level up on the inexpensive headphone. Wise investors would wait for a higher Zacks Rank to let you know that earnings estimates have started moving higher in order to surf this wave when / if it comes in.

Other Fads

There are numerous other fads other there like Poke-mon (4Kids Entertainment - formerly KDE before being delisted on June 1, 2010) and Crox (CROX - Free Report) ... and each one has its only unique set of circumstances. Most, however, will follow a general pattern of being a slight improvement on some existing product.

Once that improvement hits the trendsetters, it is destined to gain traction among the followers. Before you know it, the product has gone mainstream and the fad reaches escape velocity as media outlets cannot stop talking about it. Then, it becomes over consumed and no longer cool... because... well everyone has it and the idea of cool is inherently scarce.

Fad investors need to look for warnings signs. The biggest one is that the trendsetters are no longer using the product. Once the stories flood the media outlets, it might be already too late. Keeping abreast of the newest trends is one way to spot the wave that is coming ashore, but investors need to wait until the Zacks Rank reaches a #1 (Strong Buy) or #2 (Buy) before hopping on the next surf board of riches.

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Brian Bolan is a Stock Strategist for He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy.

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