These days, a lot of people do not have any money invested in the stock market. When asked why, some of them may tell you that they equate the stock market to a casino. They'll tell you it's all about luck, not about how much you know. I tend to disagree with that viewpoint, but it does form the basis for this article. If you had to choose a few names that would be all or nothing, over say, the next 6 months to three years, what would they be? Well, I've got five of them for you to consider. I'll analyze the bull and bear case(s) for each, and then give you my own opinion on the name.
Netflix (NFLX): Let's start off with the bull case. Netflix bulls will tell you that the company was due for a bump in the road. Netflix needs to work on its international expansion, and while that forces the company to expect a loss in 2012, it will pay off in the future. US subscription numbers are rising again, and the losses in the DVD business will level off over time. With a good year, Netflix could surprise and be profitable in 2012, and a rebound in earnings will definitely occur in 2012. This stock should easily get back to $200 in the next 12-18 months, and eventually, it will get back to over $300. Netflix is the clear leader in its space, and that won't change anytime soon.
Bears will tell you that margins are coming down, Netflix is killing off its extremely profitable DVD business, and that the streaming business in the US cannot gain too many more subscribers. Netflix's international expansion is forcing the company to lose money, and they aren't doing very well internationally. As of the end of 2011, Netflix has $4.75 billion of contractual obligations in the future, mostly related to content acquisitions. Of that, about $3.5 billion is due in the next three years. Netflix is getting whacked by every competitor, and it is only a matter of time before those competitors start stealing away Netflix subscribers. Once that occurs, this company is doomed.
So what do I think? Well, I'm leaning more towards the bear side. Netflix management tries to say that their margins aren't going to decline due to a heavier reliance on streaming. If that is the case, why are earnings per share in 2013 only expected to be $2.52, compared to $4.26 in 2011, despite revenues rising from $3.2 billion to $4.26 billion (expected). Yes, the share count will be rising, but not enough to make that kind of impact on earnings. Currently, Netflix is trading at nearly 46 times 2013 expected earnings, which in my opinion is way too much for a company only expected to increase revenues at 14% this year and 16.5% next year. Margins ARE coming down, despite what Netflix tries to tell you. Netflix's stock may rally again if the first quarter numbers are better than expected, but I don't see how this company will survive in its current form going forward.
First Solar (FSLR): The bulls will tell you that the solar industry is hitting a bottom currently and you better get in before the next rally starts. If First Solar gets back to only half of the $160 highs we saw in 2011, that's still a triple from here. The company is still growing revenues at a nice clip, projected for 30% growth this year and 12% next year. While earnings are forecasted to be down this year, they are expected to rebound slightly next year (currently expected). Current revenue estimates are near the lower end of First Solar's given guidance, and earnings estimates are at the midpoint. That leaves room for the company to beat. Yes, the company had a bad 2011, but things will get better, and this stock will shoot higher.
The bears will tell you that First Solar has taken down revenue and or earnings guidance at least three or four times in the past year, so expectations could come down again and again. The company has missed earnings expectations three quarters in a row, and it wasn't even close. The fourth quarter was a nightmare. The SEC is also looking into disclosures involving the Topaz project, and you never want them around. Last September, analysts were looking for $11 in earnings in 2012 from First Solar. Current estimates call for $4. The solar industry just isn't totally viable right now, and with too much supply and not enough demand, more companies will need to fail. Tuesday's decision on tariffs was disappointing, as they were too low. The news sent Chinese solar names rallying, while First Solar ended up with a 4.2% loss.
I'm more optimistic on First Solar than Netflix, but I don't think we've seen the bottom just yet. We have seen the company take down guidance numerous times, and they haven't exactly had a good earnings report lately. Remember, this was a name that used to blowout expectations pretty much every time it reported. Those days are gone. With margins coming down, I think we need to get rid of some oversupply, even if that means another few firms go bankrupt (or maybe a merger or buyout). I think First Solar goes lower first, but it is possible for a longer term recovery.
Bank of America (BAC): Hey, we did pass the stress test. Bulls will rejoice at that fact, stating that the company's capital position is improving and at a high enough point that the company passed the latest round of Fed stress tests. Getting back to $10 is just the start of a long rally. The company did manage a 1 cent profit in 2011, and earnings are currently forecasted to rise to 69 cents this year and $1.07 next year. Revenues should rebound in 2013 as well. Interest rates have started creeping up, and if they continue to rise, companies like B of A will do much better. Bulls will tell you that the problems in the past are all or mostly gone, and that it is smooth sailing ahead.
Bears are not convinced. They have too many questions. What if interest rates stay incredibly low for at least two more years? What if there are more significant problems in Europe? What if the US heads back into a recession? Bears will remind you that only about 3 months ago, this stock was at $5. It can drop as quickly as it can rise. They also will bring up the fact that the average analyst price target on the name is $9.17, and the median price target is $9.00. That's lower than where we are currently. Bears just think there are too many questions right now, and would avoid the financial sector, especially B of A.
On this one, I'm basically on the fence. We've seen the stock double in the past three months, and we've basically gone in a straight line up from $8 to $10. I feel that a pullback is coming. Also, while current estimates call for those profits this year and next, bank estimates seem to get taken down every week. Yes, expectations call for a 69 cent profit in 2012 as of today, but what about nine months from now? I would love to see this name get back to higher past levels, but do we go lower first? I'm just not sure on this one.
Research in Motion (RIMM): Bulls, and I can tell you from comments on my previous articles that there are plenty of them, tell you this stock is the steal of a century here. The company touts its 75 million subscribers, and the upgraded playbook is supposed to be technologically great (say the bulls). The company still is profitable, and is trading at a forward P/E of just 5 (the trailing P/E is just 3.32). Don't forget, there is also the possibility of a buyout, and someone might just want to pay up for this subscriber base. The Blackberry is still cool, and our tablets are cooler than the iPad (get it?).
Bears will tell you that like First Solar, this company has cut revenue and earnings estimates several times in the last year. Revenues for the just ended fiscal year are forecasted to drop by 5.4%, with revenues in the just started fiscal year to drop by more than 7%. In the first three quarters, RIMM sold less than a million Playbooks. Apple (AAPL), in the calendar fourth quarter, sold more than a million a week, and the new iPad has sold more than three million units already. Earnings per share are forecasted to drop from $6.34 to $4.16 (in the just ended fiscal year), and down to $2.80 in the current year. The company is struggling, and a new CEO won't change much. People and companies are switching from the Blackberry to the iPhone, and margins for the company are declining quarter after quarter. This name is dead.
I tend to agree with the bears, but I'll have more on this name in the next few days, or perhaps early next week. The company will report next week, and that could shape the future of this company. It's never a good sign that revenues, margins, and earnings are declining, and Apple is just killing them right now.
Green Mountain Coffee Roasters (GMCR): Bulls will tell you it's all about growth, and this company has it. Revenues for the current fiscal year, ending in September, are forecasted to rise by 61%, and another 30% next year. Earnings per share, $1.64 in the previous year, are expected to rise by a dollar each year. Bulls will also tell you that the recent Starbucks news will not have an impact on Green Mountain. This name is trading for less than 14 times next year's earnings, a cheap valuation for a company with this kind of growth potential. This name can easily rally back to the $100 plus levels we saw last year.
Bears will tell you that the Starbucks (SBUX) news is a killer. They will argue that Green Mountain's cash flow is not impressive, and that margins will be pressured as Green Mountain faces stiff competition going forward. Patents are expiring, and although Green Mountain is introducing new machines, other names will enter the space. They also will laugh at the rally after last quarter's earnings, which has been completely wiped out and then some. Bears say listen to David Einhorn, who helped drive this name from $90 to $40. Green Mountain is reliant on huge year over year growth expectations, and they are not likely to hit every single one of them. Bears say that this was a nice growth story for a while, but that it cannot last going forward. They also point to multiple SEC investigations, and high inventory numbers.
I was very negative on Green Mountain when the Starbucks news came out, but we are basically at the after-hours levels from that day right now. If the company's earnings are as currently expected, this stock is definitely cheap. Analysts have not taken down estimates since the Starbucks news came out, and the average price target remains in the mid $80s. That is 70% growth from here. Personally, I wouldn't hold this name for long, as we've seen some dramatic falls, but I have traded the name a few times. There is plenty of room for growth here, but I would recommend investors be cautious around any big announcements, such as earnings reports.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.