By Larry Gellar
Indices like the S&P 500 (SPY) and Dow Jones (DIA) have fallen more than 10% in the past 10 days, and for some stocks the pain may not be over yet. In fact, we’ve found 8 stocks that appear to be primed for further losses. Let’s take a look at why these S&P 500 components still have some serious downside:
Sempra Energy (SRE) – Sempra has been on a nosedive since the beginning of June, and the downward trend may not over yet. Back in 2010, the stock fell to below $45, and we would not be surprised if this happened again. Recent news that has affected this company is the announcement that Sempra will buy a solar plant from First Solar (FSLR) and then sell the power to one of Pacific Gas & Electric (PCG) companies, Pacific Gas & Electric. While the financial details of this deal have not been announced, it seems unlikely that this is a wise decision. Sempra owns San Diego Gas & Electric, which competes with PG&E. In other words, it appears that Pacific Gas & Electric will benefit at San Diego Gas & Electric’s expense. One of Sempra’s competitors that seem better positioned for future price appreciation is Edison International (EIX). EIX boasts a significantly lower P/E ratio, and P/S is lower as well. Additionally, we believe that EIX will be more efficient in the future with its greater focus on providing energy in California. Unlike Edison, Sempra has a variety of other divisions besides utilities. Admittedly though, Sempra’s cash flows of late have been quite strong with the past three quarters all seeing money come in.
Wyndham Worldwide Corporation (WYN) – Wyndham owns hotels throughout the world, and the stock has seen impressive gains since September 2010. Regardless, it seems unlikely that Wyndham will be able to keep up with larger hotel corporations such as Hilton and Marriott (MAR). MAR also offers a more attractive P/S of 0.86, compared to 1.21 for WYN. Regardless of which hotel one chooses to invest in though, the industry as a whole is probably a poor idea right now. In fact, hospitality tends to be one of the weakest sectors in times of economic trouble. With unemployment still over 9%, people will not be taking vacations the way they used to. Even if the country does avoid a double-dip recession, consumer confidence will still be very low. In fact, if the market as a whole does continue to move down, WYN will see some tremendous losses. The stock’s beta is a whopping 3.44, which could make for some serious downside. Additionally, we are not a fan of Wyndham’s recent acquisition of The Resort Company. It is unclear that this move will add significant value to WYN, and we expect it to further bloat the company’s operations. WYN has also announced a number of new partnerships lately that appear to be a desperate attempt to bring customers in.
Janus Capital Group, Inc. (JNS) – Janus is down about 50% since earlier in the year, and it seems unlikely that this downward trend is over yet. There are simply too many other strong asset management companies that Janus competes with. For example, T. Rowe Price (TROW) is doing quite well. Janus is certainly cheap right now with a P/E ratio of 7.59, but other companies may offer a better price for future growth. Consider stocks like Blackrock (BLK), Legg Mason (LM), and State Street (STT) – their PEGs are 0.98, 1.22, and 0.81 respectively. Additionally, investors in Janus’s funds are starting to get fed up with the poor returns. More info about that can be found here. In fact, with investors withdrawing their money, it’s not hard to see why Janus’s cash flows have been negative lately. Janus has also had to cut performance fees, and other important information can be gleaned from the earnings report found here. Intech may be the one bright spot in Janus with its use of mathematical models to allocate assets, but the Janus and Perkins lines will need to do better in order to retain assets. It’s also important to note that Janus’s beta is quite high at 2.85, which could be dangerous in this uncertain economy.
Netflix, Inc. (NFLX) – Until the recent selloff, Netflix was seemingly unstoppable. The truth though is that many other companies are stepping up to the plate to take on Netflix. Wal-Mart (WMT) recently launched its own video streaming service, and a variety of other companies are offering similar products. Also, Netflix will be increasing its prices soon, and there will probably be a mass exile of subscriptions once that occurs. Even now, the company’s sales aren’t high enough to justify its outlandish price. Consider the fact that NFLX is currently running at a P/S of 4.86. This is over two times the P/S for music/video mainstay Amazon (AMZN). As revealed in another Seeking Alpha article, the wise play in the video rental business is RedBox, which is owned by Coinstar (CSTR). As the economy worsens, consumers will switch to RedBox, which will be significantly cheaper than Netflix once the Netflix price increases go into effect. This is not to say that all customers will ditch Netflix – but for a stock trading at nearly $250 per share, the stock better be a true all-star. Unless Netflix can miraculously keep its market share, this does not seem to be the case. Additionally, NFLX has had quite a bit of insider sales lately as seen here.
Compuware (CPWR) – This information technology specialist has seen ups and downs over the past year, and the market seems to be indecisive as to where the stock should be priced. Compuware’s problem is growth, and there are too many other stocks out there offering a better PEG. Note that Compuware’s PEG is 2.28, while competitors like BMC Software (BMC), CA Technologies (CA), and IBM (IBM) have PEGs of 0.96, 0.98, and 1.09 respectively. As discussed in a previous Investment Underground article, IBM should not be the stock of choice here, but the point is that Compuware’s current price is quite unreasonable. Being that IBM is a supergiant and BMC and CA are also somewhat larger than Compuware, it seems likely that Compuware will simply be forced out of the software industry. Compuware’s P/E is also higher than those 3 previously mentioned companies. Regardless, if one is looking for a smaller play in the software industry, consider Concur (CNQR). As discussed here, the company’s recent earnings report was quite strong. While P/E for CNQR is tremendous right now, the company’s growth prospects are certainly worth keeping an eye on. Also, we question CPWR’s recent acquisition of dynaTrace, which ended up costing a little more than $250 million.
SCANA Corp. (SCG) – SCANA has seen quite some volatility in 2011, and the stock has gotten shellacked as of late. Dividend yield is actually 5.3% due to the recent price decrease, but who knows whether the company will actually be able to maintain that. For instance, the past year have seen a negative cash outflow, which is never a good sign. Also, competitors like Dominion Resources (D) and Duke Energy (DUK) offer lower P/E ratios, and their gross margin and operating margin are better as well. As seen in SCANA’s name itself, the company’s focus is on South Carolina, but one must question whether this is the best location to be in right now. Companies in a variety of industries are shutting down operations in South Carolina, which presumably will lower demand for SCANA’s electricity. While SCANA has a multitude of smaller businesses besides electricity, some in North Carolina and Georgia, we do not believe that the company is seeing added value from this. These other businesses, which include natural gas and even telecommunications, are simply stuffing. We prefer Progress Energy’s (PGN) business model, which appears to have its operations better integrated. SCG also has somewhat lower cash reserves than the other competitors we’ve discussed, which is another concern.
Motorola Mobility Holdings, Inc. (MMI) – Created in early 2011 as part of Motorola’s attempt to rid itself of the troubled mobile devices division, this company is separate from Motorola Solutions (MSI). MMI has declined ever since, although rumors have the company releasing a 4G LTE tablet. Can this really save Motorola Mobility? Probably not, and not just because of the ever-popular iPad. Research in Motion’s (RIMM) PlayBook is gaining momentum, and Samsung’s tablet offerings should also be well noted. As usual, Motorola is late to the party. Holding $10.27 cash per share, Motorola is financially secure, but it just doesn’t have much to do with that cash. We strongly prefer Apple (AAPL) at this point in time, and the two companies’ PEGs say it all. Apple’s PEG is 0.61, while Motorola Mobility’s is 2.65. This is a whopping difference, and it speaks to both Apple’s potential growth as well as Motorola’s lack thereof. While many shareholders (including Carl Icahn) are urging Motorola Mobility to sell its patents à la Nortel (NTL), it seems likely that Motorola doesn’t have anything very valuable. Also, selling patents cannot provide for future earnings – more cash is not what Motorola needs. Aside from the possible tablet described above, many investors are excited about the upcoming DROID 3, but this is definitely being overblown.
Boston Scientific Corporation (BSX) – This stock has been up and down in 2011, with of course a recent decline as part of Thursday’s selloff. While many believe that healthcare is a wise place for investment in a tough economy, not all healthcare stocks are the same. Boston Scientific offers many medical products that are not completely necessary. In other words, people will not do the procedures that use them due to financial concerns or at the very least will wait for the time being. Hospitals may also choose not to buy Boston Scientific products until they have more money. We prefer Johnson & Johnson (JNJ), which offers dividends unlike BSX. JNJ also boasts a lower P/E, a lower beta, and a diversified set of operations. Regardless of which stock one chooses though, investors should be aware of upcoming regulations that could put a damper on the industry as a whole. Another concern with BSX lies in the cash flow – 2 of the past 3 quarters have been negative in this regard. BSX’s inventory growth compared to revenue growth is also worth looking at, as discussed in this article. As one can see, The Cooper Companies (COO) may be a better choice from that perspective.