Let's face it. We all have the same goal, and that is to make money, and lots of it, if we can. When it comes to my writing, I try to help investors do just that, make money. Another one of my goals is to help investors avoid losing money. That's the focus of today's article. I have found five names that have rallied strongly in recent days, weeks, even months, perhaps. But if you missed the rally, well, you missed it. I don't want investors chasing names just because they've risen recently. We all know the phrase "past performance is not indicative of future results." I'd rather you miss a small rally in these names than to see you lose money if they reverse and head back down. Some of these names are up sharply in a short time period, and those gains can quickly be erased. Here are five rallies I wouldn't buy into.
Let me start by saying I'm a fan of this name. I've been one that has defended this name when the stock has been attacked by short sellers. This company has grown tremendously over the past few years, but the stock has been hammered at times. I'm still a fan of this name, and one of my 2013 predictions was that SodaStream would do over $525 million in yearly revenues. That's above the highest estimate on the Street for $524 million, and well above the current average estimate for $501 million.
So if I love the name and think it will crush estimates, why wouldn't I buy it? Well, it has to do with valuation. I'm not a fan at these levels. SodaStream, while still growing at a decent clip, is seeing growth slow down. Analysts currently expect 18% revenue growth in 2013 after an expected 47% in 2012. Also, the company does not pay a dividend like other beverage giants such as Coca-Cola (KO) and Pepsico (PEP).
SodaStream is a bit of a risky name because it is reliant on that fast growth. That has opened it up to short sellers, and as of mid-December, approximately 55% of the float was short. That's a lot. Even though I think this company will do well, all it takes is one miss and this stock will get crushed beyond belief. When I started working on my 2013 predictions, this stock was at $42 a share. I liked it there, but I didn't love it like I did in early November when it was at $34. Now it is at $47, and we just missed hitting $50 on Monday. The name started to pull back, and I think that will continue. SodaStream hasn't announced a date yet for earnings, but last year's Q4 numbers weren't released until the end of February. That's a long time from now, and I think the short sellers will come back at this before then. I love the name, and I loved the stock at $35 to $40, but I'm not a fan at $47.
Netflix popped on Monday after the company announced a new content deal. Netflix subscribers will get access to shows like "Fringe", "Chuck", "The West Wing", "The Following", "Longmire", "666 Park Avenue", "Revolution", and the "Political Animals" mini-series. But like the Disney deal it signed a month ago, there's a catch. This content won't be coming until 2014 -- that's right, next year. By the time Netflix gets access to that content, some of it will be rather old.
The second reason I don't like shares is a particularly interesting rumor -- that Carl Icahn may be selling his shares. Icahn went long Netflix late in 2012, sparking a huge rally on hopes of a takeover. If these rumors turn out to be true, watch out below. Netflix stock will drop like a rock.
The third issue I have with Netflix is one of I've talked about for a while -- increasing competition. I just had an article out yesterday talking about Amazon's latest content acquisition, and on Monday, AT&T (T) announced a small movie streaming service for its TV subscribers. While the content library is rather small, and this looks quite similar to Comcast's (CMCSA) Streampix, it's just another player into the field. I've always said that Netflix's biggest danger isn't one huge competitor, but rather the increasing amount of smaller competitors. More players in the space push content prices higher, and as I detailed in the Amazon article, Netflix has become more conservative with content purchases lately. While it made the deal Monday and the Disney deal a month ago, neither will start anytime soon. Netflix might lose more content before it gains any, as its Epix deal is up for re-negotiation this year.
Last year around this same time, we saw Netflix shares go from the low $60s to over $130. Everyone thought Netflix was back from the dead, but it wasn't. Netflix wanted to add 7 million domestic streaming subscribers this year, but its last guidance was for 5.5 million at most. Netflix shares have rallied from $52.81 to Monday's high of $101.75, but with competition increasing and Icahn possibly out, I don't see this rally lasting very long. Like those people that bought last year at $130, you don't want to be holding Netflix when the next shoe drops. The average analyst price target is $69, meaning they think shares will fall about 30% from current levels.
The credit card giant has been on an impressive run lately, and the rally increased on Wednesday after an upgrade from Goldman Sachs. Although I love the name, and called the stock one of my growth stocks to watch in 2013, I think Goldman is a little late to the party. Goldman upgraded Mastercard from Neutral to Buy, and I question their timing. They are now saying buy the name based on Tuesday's $518 close, and we are now at $527. Where was Goldman when this stock was at $420 in September, or even $490 where we finished 2012?
Again, I like Mastercard, but this upgrade combined with the tremendous rally we've seen has pushed the valuation up a little too much. Mastercard is now trading for more than 20.5 times expected 2013 earnings, and is only expected to show revenue growth of 11.9% and earnings growth of 16.5%. Visa (V), which is expected to show similar growth (slightly lower), is trading at 19.1 times earnings. To me, Mastercard is a great name, but wait until it pulls back. The $500 level looks a lot better than the $527 we are at now.
Shares of the biotech name behind the prostate cancer treatment Provenge had rallied significantly since Halloween, when it hit a 52-week low of $3.69. Dendreon started pulling back Monday morning after hitting a high of $6.24, and closed 50 cents off that price. Monday's high was the first time Dendreon had seen $6 since late July. Wednesday morning, shares traded for $5.35.
I called Dendreon one of my growth stocks to watch in 2013, but I said watch, not necessarily buy. I had been critical of Dendreon throughout 2012 as Provenge sales had disappointed and Dendreon was burning through cash. My hope for optimism in 2013 was its restructuring plan to cut the cost of goods sold, which included the closing and recent sale of its New Jersey facility. That sale was for $43 million, providing a much needed cash injection.
On Monday, Dendreon announced preliminary fourth quarter revenue numbers. The following is taken from its report.
Net product revenue for the quarter is expected to be approximately $85.5 million, which includes an approximate $3.8 million favorable adjustment to the Company's chargebacks reserve due to a change in estimate. On a pro-forma basis, excluding this adjustment, revenue for the quarter is expected to be approximately $81.6 million, up 5% on a sequential basis.
The $81.6 million was ahead of analyst estimates that called for $80.7 million. While the revenue number is up from Q3's $78 million, it is still a bit below Q1's $82.1 million. Dendreon needs to hit $100 million in revenues to be cash flow positive. Additionally, analysts think that there could have been a "year-end effect" that could have boosted Q4 sales. These analysts believe that Provenge could face stiffer competition in 2013.
While I'm glad that Dendreon beat estimates this time around, I think much of this was priced in, since we are up 20% in about six weeks. Remember, entering December, we were below $4.50. I said that Dendreon's stock could double if all went well in 2013, and Monday's news doesn't really boost my confidence tremendously. At $81.6 million in Q4 sales, Dendreon is still a long way from $100 million. I wouldn't buy into Dendreon just yet, and the first reason is the huge rally. The second is that we need to see the full results, to see how margins are doing, how much cash it has, etc. Until we know all of the information, I can't recommend jumping in.
Boston Beer (SAM):
This is another company I love, but a stock I just cannot recommend at current levels. Boston Beer is the company that brings you the Samuel Adams line of beers, along with Twisted Teas. I have sampled a number of its products and have taken the factory tour. It is a growing force in the craft brew business, and it's growing rapidly. About a month ago, the company raised its 2012 earnings forecast to a new range of $4.30 to $4.60. The old range was $3.80 to $4.20. The increase was primarily due to increased shipment volumes and the timing of certain selling, general and administrative expenses.
While it was positive that it raised its earnings forecast for 2012, we haven't yet received a forecast for 2013. That last statement about the timing of certain expenses may be worrisome, if the company avoided them in 2012 but will incur them in 2013.
Boston Beer stock rose 15.5% the day after this news, and we're up another couple of dollars since then to $135.44, and the stock is down from the recent high of $142.50. But at current levels, the company is trading at 27 times currently expected 2013 earnings. That's a bit lofty when you have names like Anheuser-Busch Inbev (BUD) at 17 times and Molson Coors (TAP) at less than 11 times. Boston Beer offers a bit more growth, but those other names provide dividends. Given that Boston Beer is a growth stock, I think a fair valuation is about 20 to 25 times this year's expected earnings. But even at the high end of that range, you're still talking about $125. I'd recommend this name in the $115 to $125 range, but I can't argue for it near $136.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.