With a twenty-four hour news cycle, it is easy to get caught up in the hype about a company without doing the homework. Before following the next talking head, let's look at three stocks making headlines and see if they are a good addition to a well diversified portfolio.
Hewlett-Packard's board barely survived a shareholder revolt at its annual meeting. Two board members received 46% and 45% no votes respectively. Shareholders also voted to have the option to add another board member in later years. This could be the reason the company announced it is increasing its dividend by 10%.
So are shareholders right to be angry? Looking at the numbers, the answer is yes. In two years the stock has been cut in half due to poor management and scandals. On top of that, earnings for 2013 are expected to shrink by 14.6%. The long run picture doesn't look better either. Hewlett-Packard is only projected to grow by 3.2% in the next 3-5 years. Revenues continue to shrink and margins are very low. In fact, Hewlett-Packard's quarter over quarter sales growth was a negative 5.58%. People just aren't buying Hewlett-Packard products. That is only half of the 6.4% growth that is expected in the S&P 500 over the same period.
The numbers are really just an extension of the mess Hewlett-Packard is in. Poor judgment and acquisitions by former CEOs have hurt this company. Combine that with the fact that Apple is taking the Hewlett-Packard to the woodshed, and you have a recipe for a struggling company. Investors would be wise to stay away.
Nike shares shot up after its quarterly report. Its EPS of $0.57 beat market analyst estimates of $0.50. Saying it saw 11% in growth in North America. Also, it's pipeline of future orders also grew, promising future revenue growth.
Is Nike a buy? Nike has a dividend yield of 1.50% and is growing a great rate. Revenues grew at an astounding rate of 10% in Q3 on a currency neutral basis. In the next year it is expected to have a EPS growth rate of 21% and a 7.7% growth rate over the next 3-5 years. Nike is basically paying you to stick around while they continue to grow.
Nike also has ambitious goals for 2015. These goals include having double digit growth in emerging markets and expanding their online business. In the most recent conference call, management said it was excited over the growth they are seeing Brazil as the country prepares for the World Cup and the 2016 Olympics. Also, Nike grew their online business 33% in Q3. In other words, Nike is on pace to reach those very ambitious goals they set out for themselves. While Nike is reaching the higher side of its fair market valuation, it is paying you to hold on to the stock for the long haul. Nike would be a great addition to any long term portfolio.
Lululemon had to recall its best selling black, women's yoga pants due to the fact that you could see through them. In fact, the recall affects 17% of its coveted yoga pants. The company admitted this could effect next quarter's earnings and, some believe, could cost the company $40million over this fiscal year. This is also the second quality issue Lululemon has had in the last nine months.
Lululemon is a high growth stock and has no room for error. Companies that grow aggressively cannot have a misstep. Lululemon is starting to misstep. First off its PE ratio is 42.9, this is much higher than the industry average of 22.7. This could be overlooked if it weren't for two problems, margin growth and competition. Operating margin shrank YoY from 27.2% to 25.3%. Even with rising revenue, if operating margin continues to shrink, so will Lululemon's growth. Lululemon management also has noted that they expect margins to shrink in Q1.
Also, Lululemon keeps incredibly tight inventory. This gives the illusion of scarcity to their customers, but with this recall, the strategy could backfire. Recalling 17% if your merchandise when inventory is tight, could drive customers to competitors. With stores like the GAP trying to steal market share, Lululemon cannot afford to drive away customers.
Lululemon still is growing its revenues but in order to be around for the long haul, Lululemon has to appeal to grow their male lines. But with such a rich valuation, it is evident that Lululemon is a hot stock. Investors would be wise to wait for a pullback before jumping in.