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Owning shares in a stock that goes down can be a very frustrating experience. Investing in a stock that goes nowhere for a long time is almost as bad. The opportunity cost of owning stocks that tread water as other stocks gain each year is just another form (indirect way) of losing money. There are many reasons a stock can go nowhere for months or years, ranging from overvaluation, to poor management, to PE multiple contraction, to cases where the company raises capital causing dilution to existing shareholders. Even an entire market can tread water for many years. The Dow and the Nikkei indexes are about where they were 10 years ago, which leads some to call it the lost decade for stocks in the U.S. and even worse for the Nikkei. These are just some of the possible reasons a stock might not go anywhere:
Overvaluation: If you pay too much for a stock, even though earnings grow through the years, you might not see much or any gains in the share price. This is common when the price earnings multiple contracts. For example, if you had bought Cisco (NASDAQ:CSCO) or Microsoft (NASDAQ:MSFT) when the PE ratio was 40 times earnings or more, you might have held either one and made nothing, even after holding for many years. Even though the earnings are higher now than they were 10 years ago, investors aren't willing to pay 40 times earnings for these names. Now they sell for about 10 times earnings.
Poor management: A company can have management that runs the company for the (excessive) benefit of the top executives. This happens when executives and directors take too much compensation, make related party transactions, take large loans that are often forgiven by the company later, golden parachutes, and grant options and stock compensation that dilutes shareholders. Management can also make bad decisions and raise capital at the wrong time, or make an ill advised acquisition. There are also times when executives make promises that are never met, and yet they keep stringing shareholders along with promises that next year things will be better. A number of biotechs have followed this route, and even though some have never developed a viable business model, executives make more promises and raise more capital. Meanwhile, shareholders are getting nowhere, (or losing money) as some companies post losses or just about break even for years. Some companies might have high debt loads which, with high interest costs, make the company barely profitable, and therefore are never very attractive investments.
With that in mind, I have researched and followed a few names that might fit the criteria discussed above. My belief is that the stocks below might not be good investments even though (in some cases) they might be well managed, or be strong companies with growing profits. I give my reasons for each below. If you are a shareholder and think my opinion is off, or that I am missing something, feel free to post your thoughts. Here are the companies:
Xoma, Ltd. (NASDAQ:XOMA), shares are trading at $4.60. XOMA is a biotech company. Earnings estimates indicate a loss for 2011.
Why Xoma might underperform: Xoma has lost money for so many years, I am surprised they are still around. Xoma did a 1 for 15 reverse stock split on August 18, 2010. If you look at the 10-year chart for this company, it has been a lousy investment to hold long term and I expect the same for the next 10 years.
Vantage Drilling (NYSEMKT:VTG), shares are trading at $1.95. Vantage is an offshore drilling company. Earnings estimates indicate a profit of 10 cents per share for 2011.
Why Vantage might underperform: Vantage has been losing money and unfortunately the company raised capital during the financial crisis when the stock price was very low. This resulted in dilution and the company now has many shares outstanding. The balance sheet is also weak in my opinion, as this company carries very substantial amounts of debt. If you look at the five year chart for this company, it has been a lousy investment to hold long term, and I expect the same for the next couple of years. I think many shareholders in Vantage are enamored with the idea of buying a driller for about $2, but with recent losses and estimates for only a small profit in 2011, there are other drillers which appear to be much cheaper in terms of PE ratio, etc. I think this company might even seek to do a reverse split one day. I see some value in VTG at about $1 but not at $2.
Autodesk, Inc. (NASDAQ:ADSK), shares are trading at $38.56. Autodesk is a 3D software company. Earnings estimates indicate a profit of $1.65 per share for 2011.
Why Autodesk might underperform: Autodesk is a well managed company, but it has had a nice run up in the stock price. Because of this, I don't think shareholders buying these shares for around $40 will see much, if any, gains for the next couple of years.
Toll Brothers, Inc., (NYSE:TOL), shares are trading at $20.46. Toll Brothers is a leading home builder. Earnings estimates indicate a profit of about 10 cents per share for 2011.
Why Toll Brothers might underperform: Toll Brothers has been losing money recently and by looking at earnings estimates for the next couple of years, they are likely to be posting minimal profits for a $20 stock. If you look at the five year chart for this company, it has been a lousy investment to hold long term, and I expect the same for the next couple of years.
KB Home (NYSE:KBH), shares are trading at $13. KB Home is a leading home builder. Earnings estimates indicate roughly break even results for 2011.
Why KB Home might underperform: KB Home has been losing money recently and by looking at earnings estimates for the next couple of years, they are likely to be posting minimal profits for a $13 stock. If you look at the 10 year chart for this company, it has been a lousy investment to hold long term and I expect the same for the next couple of years. To emphasize this point, in 2001, you could buy KBH shares for about $13 and 10 years later, you can still buy them for about $13.
Pulte, Inc. (NYSE:PHM), shares are trading at $6.93. Pulte is a leading home builder. Earnings estimates indicate a loss of about 20 cents per share for 2011.
Why Pulte might underperform: Pulte has been losing money recently and by looking at earnings estimates for the next couple of years, they are likely to be posting minimal profits. If you look at the 10 year chart for this company, it has been a lousy investment to hold long term and I expect the same for the next couple of years. To emphasize this point, in 2001, you could buy PHM shares for about $7 and 10 years later, you can still buy them for about $7.
Beazer Homes (NYSE:BZH), shares are trading at $4.36. Beazer is a major home builder. Earnings estimates indicate a loss of about $1.67 per share for 2011.
Why Beazer Homes might underperform: Beazer has been losing money recently and by looking at earnings estimates for the next couple of years, they are likely to be posting more losses. If you look at the 10 year chart for this company, it has been a lousy investment to hold long term, and I expect the same for the next couple of years. To emphasize this point, in 1994, you could buy BZH shares for about $4 and about 17 years later, you can still buy them for about $4.
Skechers, Inc. (NYSE:SKX), shares are trading at $18.55. Skechers is a leading shoe company. Earnings estimates indicate a profit of $1.39 per share for 2011.
Why Skechers might underperform: Skechers has recently reported very disappointing earnings. They are having issues with excess inventory on some of their shoe designs. I expect this stock to drift lower for at least a couple more quarters as more disappointing earnings reports are likely.
DR Horton (NYSE:DHI), shares are trading at $11.88. DR Horton is a major home builder. Earnings estimates indicate a profit of about 15 cents per share for 2011.
Why DR Horton might underperform: DR Horton has been losing money recently and by looking at earnings estimates for the next couple of years, they are likely to be posting only minimal profits. If you look at the 10 year chart for this company, it has been a lousy investment to hold long term, and I expect the same for the next couple of years.
As you can see, I don't expect much from homebuilder stocks. There is a lot of data pointing to a double dip in the housing market which you can read about here.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Value Traps: Why These 9 Stocks Could Be Dead Money or Worse