I received some hate mail on Wednesday for calling Bank of America (NYSE:BAC) a villain. While I think the overall theme in that article was egregiously missed by some readers, by the volume of hate mail that I received, it was refreshing to know that I am still making an impact. It was suggested to me that I should go back and study BofA’s history a little bit better. It is also interesting that there are a select few that still wish to somehow correlate my slight disdain of BofA as being inconsistent with my bullish stance on Sirius XM (NASDAQ:SIRI). That is to say, they are both cheap, yet I (supposedly) “bash” one and not the other.
I’m going to let you in on a little secret – about my family, I do the cooking. I know what you are thinking already, “Cameron, now we know at least two things you are poor at.” Fair enough, but with that said, it reminds me of a saying by former Miami Dolphins President, Bill Parcells, who then as a head coach of the Patriots famously said, “If I’m gonna cook the meals, I should at least be allowed to shop for the groceries.” In other words, if you are going to evaluate my coaching ability on the field, it is only fair that I get to choose which players that should play. It makes perfect sense.
Now, as the renowned chef in the family, I have come to realize that my meals are only going to come out as delightful as the quality of items that are used from my pantry. This goes back to the need to pick one’s own groceries, because the wonderful experience of grocery shopping often reminds me of stock picking – to the extent where my portfolio’s performance is weighed heavily on picking the right stocks and having a clear understanding of the difference between “value” and “price.” Interestingly, I buy both my groceries and my stocks in a place called “the market.” But that’s not where the similarities end.
When “Cheap” Becomes “Too Cheap”
As in the above example, where a few readers want to identify both Sirius and Bank of America together as being “cheap," I have come to realize there are various categories of that definition. One of the traits that fuse and unify all investors together in the market (or in the grocery store) is the need to find a bargain or a cheap stock to buy. But the mistake that investors often make is a failure to realize that not every “cheap” stock is the same.
Having a clear understanding of why the stock has become cheap can be the difference between a dented can of string beans, (which will taste the same as the non-dented one) and a box of cereal that is two days away from its date of expiration. Going into 2012, let’s take a look at some cheap, dented and (possibly) expiring companies where coupons may no longer be required.
Bank of America - The Unloved
Admittedly, I’ve beaten BofA to a pulp (another food reference), whether fairly or unfairly. It needs to perform – if not for its own sake, certainly it should for the sake of its investors as well as the many people who rely on its ability to offer banking services and loans at reasonable rates. It has one of the largest networks of branches in the country and easily accessible from any location. So why can’t it get its act together with having such an advantage?
Upon the release of its Q3 earnings results, there were several divisions that reported declines in revenue, most of which were in investment banking where revenue fell to $5.22 from more than $7 billion a year ago and $6.80 billion in the second quarter. Although deposits have risen by $11 billion to $422 billion, they were down significantly from last year’s quarter of $427 billion.
It has become cheap because it has received the label on the Street as being unloved. And with early signs of (only) a modest U.S. economic recovery coupled with a recent S&P credit rating downgrade, how much are investors willing bet that it will soon no longer trade below its current value?
Sirius XM - The Misunderstood
I could have easily also categorized Sirius as being unloved, but I think one of the challenges for this company and its (would be) investors is that there are many that simply do not understand the whole story. While Sirius continues to show clear signs of recovery, it is burdened with the memory of its brush with bankruptcy a couple of years ago. As a result, there are many who are unwilling to forgive much less stick their neck out and give it another chance.
But remarkably, that doesn’t matter. How do you assess a performance where recent profits surged 54%? Not only did the company beat analysts’ estimates by earning 2 cents per share, its revenue rose 6.3% to $762.6 million from $717.5 million. Including the recognition of deferred subscriber revenue, the company said it posted adjusted revenue of $764.8 million, which was up from an adjusted $722.5 million from the quarter a year ago. It sits in the bargain bin as “misunderstood” because there is evidence that it is not yet priced on its true merits and 2012 will be much different.
Cisco Systems (NASDAQ:CSCO) – Wait and See
Cisco is one of those companies that is hard to categories as “cheap” because not only has it been one of the best performers on the market over the past four months, but it sits only percentages away for its 52-week high. While I don’t think it fits the category of being unloved or misunderstood, I do think it continues to suffer from the market sentiment of “wait and see” – an mind-set that I think is more than appropriate.
It has disappointed investors for the better part of the last decade and now appears to have gotten its house in order. While I think it is on the verge of regaining its Wall Street darling status, I can also appreciate that it is going to take more than a couple of good quarters before it is awarded that distinction. Recently, I gave you three reasons why Cisco will reach $25 - It has momentum, focus and produces results. As the year draws to a close, it is showing to be sustaining the qualities of all three.
Microsoft (NASDAQ:MSFT) – I Wish I Knew How To Quit You
If that line sounds familiar, it’s because it was said in the movie “Brokeback Mountain.” Things just seem out of place when Microsoft is irrelevant. I wish it could rediscover the formula to become dominant again and regain the glory days of when it was hated. Now the stock is “cheap” because investors just don’t care.
I continue to be a staunch supporter of Microsoft, but I refuse to make excuses for what I continue to see as a series of missteps. In a recent article by Seeking Alpha contributor Leonid Kanopka, I was reminded why I first invested in Microsoft. But I left regretting not investing instead in Apple (NASDAQ:AAPL). While Leonid is correct in his assessment of Apple’s rise to dominance, I would have to disagree in his notion that Apple’s success makes Microsoft an undervalued play.
The fact of the matter is, (as a shareholder) I can say that Microsoft’s perceived irrelevance is the fault of its own. The company has been immaterial long before Apple’s prominent rise. There is no lack of opinion for why it has been so average and uninspiring, but the questions that should be asked is how can its value be restored? For me, the surest way for this to happen is to go in a different direction and replace its current CEO, Steve Ballmer.
However, as angry as the company has made me for having held its stock for the past 10 years, it is hard for me to quit appreciating what it has done and accomplished. I’m typing this article (as I have done every other article) on Microsoft Word – I love the product and can’t quit using it. I am certain that is also the case for millions of people. The company is clearly not going away, but its current CEO has more than worn out his welcome and should immediately step down.
Netflix (NASDAQ:NFLX) – Just Shut Up
There’s a very poignant line from the show “King of the Hill” where Hank Hill eloquently says, “Just when I think you’ve said the stupidest thing ever, you keep talking.” I think Netflix in that regard deserves that distinction. It has shown the remarkable ability to not only shoot itself in the foot, but it then firmly places that foot in its mouth. In an article written by fellow Seeking Alpha contributor Rocco Pendola, I was awed to read the following quote from Netflix CEO Reed Hastings:
DVD will do whatever it's gonna do. We're gonna try to, ah, not hurt it, but we're not putting a lot of time and energy into doing anything particular around it.
This is someone supposedly running a business where he completely dismisses what was once its bread and butter – the same idea that caused several Blockbuster stores to close. This comes on the heels of announcing that it has agreed to raise $400 million by issuing additional stock and selling bonds which can also be converted into stock. In other words, it’s diluting its already depressed shares. This only reinforced what Seeking Alpha contributor Pendola has warned for quite some time - that the content acquisition strategy was more expensive and egregious than it led investors to believe.
If that was not bad enough, the company also announced that it expects to be unprofitable for all of 2012. This is after many analysts were expecting a profit. The company added that revenues would be flat until its subscriber base rises, but said it couldn't be certain whether such growth would happen. Clearly, it is hard to say with any degree of certainty at the moment if the stock is still “cheap.” Relative to its $300 high it certainly is, but the question is, was there value there to begin with? I will leave that up to you to decide, but I am certain that we all can agree that until we figure it out, it first needs to shut up.
Research In Motion (RIMM) - Everything Has To Be Right
For a company that was once on top of the smart phone world, it now seems to not be able to catch a break. It is a foregone conclusion that the company has long lost the phone war to both Apple (AAPL) and Google (NASDAQ:GOOG). But while having hedged its entire future on its new QNX operating system, it appears it has also lost (albeit temporarily) a battle with a relatively unknown firm over the name of its next generation OS.
U.S. District Judge William P Johnson in Albuquerque granted a temporary restraining order on Tuesday requested by Basis International that bars RIM from using the BBX mark. In granting the request, the court concluded that "the BBX mark is identical to the mark which RIM is allegedly using to present its BBX product".
I’m not one to believe in omens of any kind, but this can’t be a good sign that anything is going to go right. Any other company of RIM’s stature would have asked the smaller firm (silently), “How much is it going to cost to acquire the name.” Or if that didn’t work, buy the entire company. Instead, “BBX” will now be known as “Blackberry 10.”
As is the case with Netflix, it seems the only good news for RIM comes when it remains silent and says nothing at all. Not only did it say that it would miss its adjusted 2012 profit target of $5.25 to $6 a share, the company also announced that it expects its Q3 revenue to be come in lower than its previous range of $5.3 billion to $5.6 billion.
The company will release its third quarter fiscal 2012 results on Dec. 15 where it warns that earnings per share should be at the low to mid-point of the company’s previous forecast of $1.20-$1.40. It attributed this revision to lower unit shipments in the fourth quarter. I (on the other hand) attribute it to poor management. Where some may see the stock as being “cheap” I don’t see how it can move higher when it relies on everything having to go right.
Atmel (NASDAQ:ATML) – Economic Casualty
For one reason or another, I have become extremely enamored with Atmel. The company disappointed investors when it reported Q3 earnings results. Though it announced a 15% increase in revenue from the previous year, that number was flat on a quarter to quarter basis. As a result, the stock has taken a beating to the level where I think we can all agree that relative to its peers such as Intel (NASDAQ:INTC) or ARM Holdings (NASDAQ:ARMH), it has become “cheap.”
Atmel is one of those stocks that have been beaten down due to slowness in the economy. This is why I recently recommended it as one of the possible Cinderella stories in 2012. While it may seem as if I am making an excuse for it by suggesting that its “cheap” price is due to the economy, there is evidence to support that this is in fact a fair point. There is clear evidence that concerns regarding the overall strength of the economic recovery as well as the computer sector weighed heavily on its recent declines.
While it does not stand alone in that regard, it does stand to benefit more so than many (within the sector) from customers replenishing their inventories when the economy is in full recovery mode. Investors can also expect to see its shares rise as a result of the sustained growth in smart phones, as well as tablets in the first two quarters of 2012.
Clearwire (CLWR) - Untouchable
While the term “untouchable” may bring about the aura of polarizing and confidence in everyday life, on the stock market it is akin to being sent to Siberia. There is a faction of stocks on the market that are cheap because they are deemed untouchable by institutions – a lot of which has to do with not only some statutory rules placed upon mutual funds, but many market professionals exclude some equities on the basis of their volume, price and market cap. I agree that these rules make sense, but I also agree that they often serve (at times) to sustain the printed scarlet letter already attached to the same stocks they are forced to avoid.
Clearwire falls into that cheap category. Though last week it received a slight boost in its signal from a familiar friend. The company is partnering with Sprint (NYSE:S) in what appears to be a win-win situation for both companies in a network sharing deal. Clearwire desperately needed cash and Sprint needed a network. The new agreement, said to be valued at 1.6 billion, extends a current deal that would have expired at the end of 2012. But still at only slightly above $2 per share, many institutions will not touch it with a 10 foot pole. I suppose you can argue that Sirius XM also falls into that category, but the difference is, Sirius makes money.
While every investor wants to buy a “cheap” stock, every investor should also realize that not every “cheap” stock is made the same and should seek to understand why it has been labeled that distinction. That said, there are numerous examples of where cheap stocks (by any definition) have generated many winners on Wall Street, but these are more exceptions than they are the rule. In other word, caution should be the right approach. While I will concede that the market overall is highly inefficient, I also tend to agree that the market is also always right. Therefore while shopping for cheap stocks, it is best to consider the dented cans over the ones with expiration dates.
Disclosure: I am long SIRI, CSCO, MSFT, AAPL, ATML.