By Steve Morris, Guest Editor
We have identified stocks plagued by long and short-term concerns that are underperforming their peers. Here is my analysis:
Winnebago Industries (WGO): The economy is on its back from the recession in recent years and many people across the world are unable to afford their house or have an upside-down mortgage on one. Winnebago is a company that makes three different classes of motor homes that are considered a luxury. The company is likely to suffer greatly. Sales and revenue may come up short for Winnebago.
Because its products thrive when consumers have excess cash, it is easy to see why this company has struggled recently, and could even have a few more hard years ahead of it. Winnebago is currently trading around $11.25 after dropping drastically from over $30 dollars a share, pre-recession; and Winnebago is sporting a current price to earnings ratio of 19.
Another negative for Winnebago is the fact that the company has gone from a consistent dividend-yielder to one that hasn’t issued a dividend in three years. Winnebago's reputation as a dividend stalwart is tarnished.
Struggles with a bad economy and products that are considered a luxury have punished the entire industry, but Winnebago has seen some of the biggest drops in sales. Winnebago revenue growth in the last three years has averaged -19.8% and its earnings per share growth for the same time period is -35.8%. Both numbers show that Winnebago is struggling, relative to industry averages. A falling stock price, no sign of a reawakened dividend, and an economy that won’t see a turn for luxury items for a few more years now, all point to a sell here.
Another stock that has not issued a dividend since 2008 is Ctrip.com International Ltd. (CTRP). Ctrip.com is a Chinese company that takes potential travelers and matches them up with hotels and flights located in China. Much like Expedia (EXPD) and Hotwire.com, Ctrip.com does much of its business online. However, over 60% of its revenue is from travelers calling into one of its many call centers. What worries me about Ctrip.com is its high price-to-earnings ratio of 44.2, as well as the high unpredictability of this company over a cyclical, consumer-discretionary earnings cycle.
High price-to-earnings are a common symptom in industries that are highly susceptible to bubbles. Also, Chinese companies and technology and information-based companies are often at the center of bubbles. In this case, Ctrip.com falls into both categories. My fair value estimate of this company is $28 on a DCF basis. I use a 12% discount rate. Above $40 per share, Ctrip.com is a short.
China Agritech Inc. (OTCPK:CAGC) is a company that operates in China's agricultural industry. With 305 employees, China Agritech produces and sells fertilizer products, with its biggest product being organic liquid compound fertilizer. China Agritech is currently trading at the price of $2.4 [and is down another 12.5% Wednesday at $1.97 as of 3:30pm -Ed.]. This has fallen in the last year from over the $18 dollar mark as the company has a suspicious PE ratio of 3.6. Another number that is not showing promise for potential or current CAGC investors is the fact that its earnings per share growth over the last three years is negative 11.7%.
China Agritech recently moved to the pinksheets. Many Chinese companies have felt a decline in stock price and earnings per share, as well as a hit to Chinese markets and China's reputation. This decline is powered by a dozen or more recently halted Chinese stocks that have been dealing with accusations of fraud and mismanagement. With these numbers and the uncertainty of Chinese markets at an all time high for investors, China Agritech is a risky bet. I recommend selling short here.
Finisar Corporation (FNSR): Finisar’s main product and service is providing fiber optic subsystems and network performance test systems. The company's products and services allow for data communications over local area networks and storage area networks. Finisar is currently trading at $19 and its stock price has almost been cut in half over the last 90 days alone, when it stood at over $43 a share.
Finisar has a PE of 18 and a forward PE projected at 14. The drastic drop in stock price was driven by Finisar projecting its fourth quarter numbers for earnings per share to be in a range between $0.31-0.35, with revenue of $235-250 million. Analysts had estimated much greater numbers of $0.48 earnings per share on revenue of $268.55 million, which might have inflated Finisar’s price in the recent months.
With a diving stock price, and Finisar publicly stating that it needs demand for its products in China to pick up drastically before it can see a recovery to forecasts, Finisar is a risky holding.
Aflac Incorporated (AFL) is a very large insurer which employs about 8,000 personnel worldwide. Aflac offers health insurance and life insurance in the two largest insurance markets in the world: The United States and Japan. Aflac's presence in Japan is one of the reasons that many investment gurus are skeptical of Aflac’s future, as a core part of its policies and insurance packages are based around cancer policies. Life insurance claims have seen a spike since the awful tragedy that struck Japan is now impacting its Japan demographic. It is clear that some policy holders faced nuclear radiation. It is a very real possibility that Aflac could also see a latent spike in policy holders that develop cancer. This could impair Aflac's cash flows going forward.
That being said, Aflac is currently trading at $47 per share and has been dropping for about three months. Aflac is sporting a current price to earnings ratio of 8.3, with a forward price to earnings of 7.4. Aflac set an earnings-per-share growth target of 0% to 5% for next year, and many analysts have said they would be surprised if they saw this amount of growth. Aflac, once a company on firm footing, is going through some turbulent times. For investors, Aflac is a short-term sell.
LinkedIn Corporation (LNKD) is trading at $77.50. LinkedIn is a company that operates a business-friendly social networking site, LinkedIn, and boasts over 1300 employees and 70 million members. LinkedIn’s revenue comes from three different areas: Hiring solutions, online advertising, and premium subscriptions.
Two weeks ago, LinkedIn had its initial public offering at an initial price of 93 dollars, and, after an initial spike, the share price has been falling ever since. The concerns for LinkedIn are very straight forward; competition from Facebook, Twitter, and other social media outlets is fierce. LinkedIn suffers from overvaluation and we think investors may quickly fatigue once the initial buzz around shares loses its luster.
LinkedIn currently has a price to earnings ratio that is sitting at an outrageous 1150; and with a PE this high it is often a signal of an overvalued stock or a bubble waiting to burst. With the entire industry of social networking exploding right now, investors must be careful not to get trapped in LinkedIn at the wrong time. Prospects surrounding the company's growth going forward are uncertain. In this light, LinkedIn is a long-term risk and should not be viewed as a long term buy. I recommend selling LinkedIn.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.