There is plenty of optimism in the market regarding the improving U.S. economy, resolution of the Greek debt problems, and the number of earnings surprises lately. But 2012 is not going to be all smooth sailing. A large number of stocks with below-average fundamentals and prospects for growth have gone up in value simply because the market has spiked. Here is a look at five of them:
Groupon (GRPN), the e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount, went public in 2011 with lots of fireworks and high hopes. The company is currently valued at over $12.4 billion. Revenue growth has been great but the business is still losing money. The only advantage Groupon had was that it was first in its sector to make a splash and then to go public. That advantage has now used up its power and the reality of this business model is setting in. Groupon's daily deals model is very easy to copy, and hundreds of competitors have already moved into the space, including Google (GOOG) Offers and Living Social. In addition, Groupon currently does not have a good way to retain customer loyalty and many customers have multiple accounts to take advantage of the deals.
I’m really not sure why anyone would pay $12.4 billion for a company that has negative earnings, negative book value and is at risk of losing market share to its vast and growing number of competitors.
Amazon.com (AMZN) does dominate the online retail market and has diversified its assets into a number of businesses. Its business centers on rock-bottom pricing that squeezes most competitors out. However, the stock appears overvalued, based on its ever increasing shipping costs, trailing P/E of 96, forward P/E of 91, trailing net profit margin of only 4.5% of revenue, and gloomy prospects of increasing profitability. In the first 9 months of 2011, thanks largely to Amazon Prime, Amazon's net shipping costs grew to account for 4.9% of its net, up from just 2.9% in 2007. The company will report its Q4 2011 results at the end of this month and some analysts are already predicting another earnings miss.
Amazon expects its Q4 sales to come in between $16.45B to $18.65B. Earnings are expected to be around $0.20 in Q4 2011, down 78% from Q4 2010. Amazon’s earnings in Q1 2012 are forecast to shrink too. And let’s not forget that Amazon does a significant amount of business in Europe, and the European debt problems are far from over. In Q3 2011, Amazon’s international segment net income was lower by 46% to a profit margin of just 2.4%.
Office Depot, Inc. (ODP) has already received an underweight rating by UBS. The stock was trading at around $5 a share at the same time last year, and is now at $2.57. The company announced that for Q4 2011, it expects sales in constant currency to be down slightly on a like-for-like basis versus the prior year and operating profit excluding charges to be roughly flat.
While some retailers are showing signs of improvement, Office Depot is still generating declines in sales across all three of its business segments. The company seems to have neglected marketing and is losing the online battle with rival Staples (SPLS).
Hovnanian Enterprises (HOV) - this national homebuilder’s stock is currently the most volatile among its peers, routinely seesawing by 10% or more daily. At $2.50 a share, the stock price is up a staggering 100% in one month, fueled by high hopes of a swift real estate market recovery. The NAHB index is indeed up for the 4th straight month, but is still very low based on historical levels. HOV simply is worse than its competition as it continues to lose money every quarter and its book value is horrible. During Q4 of fiscal 2011, the after-tax net loss was $98.3 million, or $0.90 per share, compared with a loss of $132.1 million, or $1.68 per share, in the fourth quarter of the prior year. For the year ended October 31, 2011, the after-tax net loss was $286.1 million, or $2.85 per share. This stock is only for day traders as it is too speculative.
Sears Holdings Corporation (SHLD) is another company that has recent operating statements containing predominantly red ink. Recent reports on expanding consumer credit and confidence have lifted the stock price from its 52-week lows. However, EPS over the last 12 months was -$3.38 and the latest quarter was particularly unforgiving with a loss of $3.95 per share. At the same time the competition is doing fine - both JC Penney (JCP) and Wal-Mart (WMT) have remained profitable in the past 12 months, even though JC Penney had a small slip-up last quarter. It appears that Sears’ brand image is on a downward slide, evidenced by its announcement that it’s closing over 100 full-line stores. This is a huge sign that the company’s business model needs a revision, which of course would be a costly and time-consuming process.