To The Moon

Markets are full of contrasts, and this past week highlighted it perfectly.

On Wednesday, Meituan (03690) reported earnings that disappointed investors. Profits took a hit. The market responded swiftly: the stock plummeted.

MEITUAN-W (03690)

Just a day later, Alibaba (BABA) released its results, and the market cheered—a 12% surge in the share price.

Alibaba (BABA)

Meituan CEO Wang Xing offered a compelling perspective on this dichotomy:

“In a big competition, being the underdog is the most exciting position to be in. That’s why this is so thrilling.”

This raises a critical question for investors: do we follow the trend, or do we bet on the underdog?

The Underdog Advantage: More Than Just Emotion

Investing in underdogs isn’t just about rooting for the little guy. It’s about strategic opportunity. Underdogs often trade below intrinsic value due to short-term setbacks or market pessimism. This creates asymmetric risk-reward profiles: the downside is often limited if we choose wisely, while the upside can be substantial.

1. Stability is Key

Not all underdogs are worth betting on. Financially fragile companies can become “falling knives” that destroy capital. The first rule is financial stability:

• Profitability matters. Even modest positive net income signals the company can survive tough periods. Companies with consistent losses or high debt may collapse before a turnaround can happen.

• Cash flow is king. Positive cash flow allows a company to invest in growth, pay off debt, or weather economic storms.

• Leadership matters. Strong, adaptable management can pivot strategy and rebuild confidence—think of Apple under Steve Jobs in the late ’90s.

Example: AMD was once considered a perpetual underdog compared to Intel. But careful investors who recognized its stable balance sheet, growing niche markets, and leadership commitment benefited handsomely when the company executed its turnaround.

2. Valuation Sweet Spot

Buying an underdog near its 52-week low is about maximizing potential reward while minimizing risk. The market often overreacts to temporary setbacks, creating opportunities for disciplined investors.

• Psychology of lows: Stocks at depressed levels can attract fear-selling. Some view this as opportunity rather than a signal to panic.

• Margin of safety: Buying near lows provides room for error. If growth takes longer than expected, losses are more limited.

• Optionality: Low valuations make even small positive developments (new contracts, regulatory changes, product launches) have outsized impacts on stock price.

Example: Netflix’s stock in 2011 was heavily discounted after the Qwikster debacle. Those who ignored the headlines and focused on fundamentals saw exponential gains as the company transitioned to streaming dominance.

3. Dividends as a Cushion

Dividends turn waiting into a tangible payoff. For underdogs, the patience required can be long but dividends provide a stream of income that softens the volatility.

• Time-value of dividends: While the stock rebuilds, we’re still earning a return. This is especially useful in sectors with long turnaround cycles.

• Signal of stability: Companies paying dividends, even modest ones, often demonstrate confidence in their financial position. It suggests management believes the company can sustain operations and eventually grow.

• Reinvestment opportunity: Dividends can be reinvested to compound returns while waiting for the main bet—the stock recovery—to play out.

Why Following the Crowd Can Be Risky

Popular, high-flying stocks may feel “safe,” but there are hidden pitfalls:

1. Limited Upside: By the time a company becomes a household name, most of its good news is already priced in. Significant upside is harder to capture.

2. High Expectations: Market favorites are under constant scrutiny. Missing even modest targets can trigger sharp declines.

3. Complacency Risk: Investors may assume strong companies will always grow. But technology cycles, competition, or regulation can erode profits quickly.

Even strong companies can fall from grace—just ask Apple in 1997, or Netflix in 2011 when it stumbled with Qwikster. Hype and reputation don’t guarantee future returns.

Lessons from History: Underdogs Who Made a Comeback

Apple (1997) – From the Brink to the Icon

In 1997, Apple was teetering on the edge of collapse. Its product line was confusing, finances were strained, and investors were losing faith. Enter Steve Jobs, returning to the company he co-founded. Jobs brought not just vision, but ruthless focus: simplifying products, improving design, and delivering innovation that consumers didn’t even know they wanted. The launch of the iMac marked a turning point, combining sleek design, marketing flair, and technological appeal. Apple went from an underdog fighting for survival to a global powerhouse, proving that strong leadership and strategic focus can turn even near-bankruptcies into legendary comebacks.

Apple (AAPL)

AMD – The Scrappy Challenger in the Chip Wars

Advanced Micro Devices (AMD) has long been the underdog in a market dominated by Intel. For decades, it was seen as the smaller, weaker competitor, struggling for relevance and profitability. Yet AMD never stopped innovating. By focusing on niche markets, high-performance GPUs, and cutting-edge processors, the company slowly clawed back market share. Its turnaround shows that persistence, targeted strategy, and technological differentiation can allow an underdog to challenge even the most entrenched incumbents. Investors who recognized AMD’s strategic moves early were rewarded handsomely as it transitioned from perennial underdog to a major player in computing and gaming markets.

Advanced Micro Devices (AMD)

Netflix (2011) – From Qwikster Fumble to Streaming Dominance

Netflix is another classic example. In 2011, the company faced a backlash over its ill-fated Qwikster spin-off plan, coupled with concerns about debt and competition from traditional media. Many investors doubted its ability to pivot effectively. Yet Netflix doubled down on innovation, investing heavily in streaming technology and original content, building a moat that traditional media companies struggled to match. Today, Netflix is synonymous with streaming entertainment, illustrating that even companies that stumble publicly can recover spectacularly if they execute on vision and adaptation. The lesson: short-term missteps don’t define long-term potential.

Netflix (NFLX)

The Takeaway

• Look beyond hype: Popular stocks are tempting, but often already expensive.

• Focus on fundamentals: Stability, valuation, dividends, and leadership matter.

• Be patient: Underdogs take time, but the rewards can be significant.

Investing in underdogs isn’t just thrilling, it can also be strategic. It’s about identifying companies the market may be underestimating today, with the potential for significant upside in the future.

But a word of caution: not every underdog makes a successful comeback. Some continue to struggle or even fail entirely, which is why financial stability, valuation, and strong leadership are critical criteria before taking a position.

Being patient and disciplined is key. Sometimes, the opportunity lies in quietly backing a company that others overlook but even then, the outcome is never guaranteed. The reward can be substantial if the turnaround succeeds, but the risk is real if it doesn’t.