By Mark Goldstein
In this article, I analyze three stocks that are overvalued on a relative value and growth basis. Due to what I think will be heightened uncertainty in their valuations going forward, these three stocks could be good short-selling candidates. I identify these stocks based on their trading prices that are not justified by their earnings outlooks.
Netflix, Inc. (NFLX): Shares are trading around $125 at the time of writing, against their 52-week trading range of $74.25 to $304.79. At the current market price, this implies that the company is capitalized at $6 billion. Earnings per share for the last year were $4.40, and, being a growing tech name, it paid no recent dividend. Netflix offers Internet video streaming to computers running Windows or Mac OS X and to compatible devices. With the announcement of management changes, Netflix gave its fourth quarter earnings report on January 25. Netflix earned $40.7 million, or 73 cents a share. In the same period in 2010, it earned $47.1 million, or 87 cents a share. Expenses were the culprit, and I don't see administrative and marketing expenses coming down any time soon given that competitors will begin to eat away Netflix's market share if it lets up on its marketing efforts. The potential non executive management change does not signal any growth prospects. After the recent 25% run-up, investors can just wait and watch how Netflix reacts against the upcoming market challenges, and also maintains DVD business as its streaming business cannibalizes it.
Another factor that investors do not appreciate is that Netflix is attempting to "increasingly license content on an exclusive basis," which, in my opinion, could backfire as content providers balk at exclusivity demands. The content market is more mature than the streaming and DVD delivery businesses and has the ultimate ability to control itself through copyright protection and non-exclusive licensing. Netflix management finally realizes that it needs exclusivity to differentiate itself. However, content providers face a different calculus; namely that they can achieve higher profits through multi-provider deals. Netflix would bear insurmountable costs in its attempt to provide a significant portion of content exclusively. In my opinion, the company continues to be unable to create a moat or gain any significant competitive advantage beyond "first-mover." Unfortunately, the company will likely face a tough road without significant, unprecedented moves to create exclusivity.
Liz Claiborne, Inc. (LIZ): Liz Claiborne designs and markets a global portfolio of retail-based premium brands including Juicy Couture, Kate Spade, Lucky Brand Jeans and Mexx. The stock traded around $9 at the time of writing, and has a -4.43% operating margin. The stock has a market cap of $900 million. Earnings per share for the last year were $-4.57. Investors should probably avoid this stock, because it cannot grow its way into earnings. According to the CEO William McComb's latest announcement, the price slash for the its products did not lead to any growth for the company. Sales are expected to remain stagnant for this fashion name for the first quarter of 2012.
InterOil Corporation (IOC): In trading last week, shares of InterOil Corp traded around against $67 per share, their 52-week trading range of $31.18 to $81.92. At the current market price, the company is capitalized at $3.3 billion. Earnings per share for the last year were $-0.67, and it paid no dividend. In Libya, the civil war ended only recently, and the situation for operators in the region remains a bit shaky. Companies in Libya include Occidental Petroleum (OXY), ConocoPhillips, Marathon Oil (MRO) and Hess (HES). Due to a shortage of supply, the demand has increased overnight causing an upward pressure on the prices. As per the statistics of InterOil, it is not going to pay a dividend any time soon.