Wednesday, November 7, 2012

4 Stocks To Avoid Like The Plague And 1 Shining Star To Buy Now


I usually write about stocks I would buy. This time I'm going to focus on stocks of companies I believe are broken. These companies have unsustainable business models and in some cases outrageously priced stocks. These stocks should be avoided like the plague. I am always searching for diamonds in the rough and love a great comeback story. Nevertheless, these four bottom dwellers will most likely never comeback.

I have included one company with all the right stuff, a true triple threat. The company has strong fundamentals, is technically sound and has product and service catalysts on the horizon.

In the following sections we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Wednesday's performance for the stocks.

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Apple Inc. (AAPL)

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Apple closed Wednesday at $606.26, flat for the day. The company is trading 5% below its 52 week high and has 20% potential upside based on the analysts' consensus mean target price of $726.89 for the company.

Apple is undervalued based on fundamentals. Apple is trading for 12.71 times free cash flow. Apple's quarter over quarter EPS and sales growth rates are 92.28% and 58.86% respectively. Apple's net profit margin is 27.13%. Apple's ROE is 47.10% and the company has no debt.

Technically, the company is in a well-defined uptrend since the start of the year. The stock is currently resting on the bottom of the trend channel, which is an ideal time to buy a stock.

In a research note sent to investors on Tuesday, Morgan Stanley called the upcoming launch of Apple's much-rumored next-generation iPhone "one of the most significant product cycles in two years," and expects the device to lead a strong fourth quarter performance.

Apple is fundamentally and technically a buy at this level. Couple this information with the opportunity for growth in China and upcoming product launches and you have a recipe for profits.

Facebook, Inc. (FB)

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I see three major headwinds for Facebook. First, 1.7 billion shares are due to hit the market as staggered lock ups expire. A majority of the locked up shares will hit the market prior to the end of 2012. Second, I question the number of current and future users of the site willing to be leveraged. There may be a mass exodus if privacy settings are changed once more or intrusive advertising methods are implemented. Finally, I submit the bulk of the prime advertising demographic accesses Facebook via their smartphone. This is the proverbial Achilles heel for Facebook. The company is currently unable to display advertising on smartphones.

According to a recent report by The American Customer Satisfaction Index [ACSI] Facebook recently came in last place for customer satisfaction among e-businesses with a score of 61 out of 100, an 8 percent drop from the company's score last year of 66. In fact, the company scored so poorly that it set a new record the lowest score in the social media category. As a user of Facebook I can understand why. It has become too cumbersome. I dropped the alerts service because they started alerting me every time one of my friends had a drink.

The lock up expiration will be the catalyst to drive the stock lower in the near future. With 2 billion shares outstanding and 1.7 billion on the way the dilution will weigh heavily on the stock. Think about it, the number of shares outstanding will practically double. I am seriously considering shorting the stock.

Groupon, Inc. (GRPN)

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Groupon closed Wednesday at $7.07, down almost 2% for the day. The company is trading 77% below its 52 week high and has 145% potential upside based on the analysts' consensus mean target price of $17.33 for the company.

The company is not currently profitable. Sure Groupon has massive upside potential based on analysts' estimates, but in this case I must disagree. I signed up for the service but quickly found it useless and unsubscribed from the service. A local clone of the product called Clickedin serves my purposes much better. I just don't buy in to the company being able to monetize a coupon service.

Technically, the stock is the definitive falling knife. The chart looks terrible. It looks like it's on the fast track to zero. I would not touch this stock with a ten foot pole.

Nokia Corporation (NOK)

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Nokia is trading well below its consensus estimates and its 52 week high. The company is trading 75% below its 52 week high and has 75% potential upside based on the analysts' consensus mean target price of $3.02 for the company. Nokia was trading Wednesday for $1.73, up over 2% for the day.

Fundamentally, Nokia looks like a dead man walking. The stock has negative quarter over quarter EPS and Sales growth of 370% and 30% respectively. The company is unprofitable and burning through cash. The company paid a dividend with a yield of 14.60, but I am close to being certain you will never clip that coupon.

Microsoft (MSFT) has decided to practically give the Nokia Lumia 900 phone away in an attempt to gain market share. The company dropped the price to a mere $50. The stock is in a downward spiral with no end in sight. If you are buying into this stock on the hopes of a takeover, you may find no place to hang your hat. The stock price is so low at his point the potential buyers would most likely rather pick up the pieces in a bankruptcy auction. Dump this one now.

Zynga, Inc. (ZNGA)

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Zynga is trading well below its consensus estimates and its 52 week high. The company is trading 71% below its 52 week high and has 148% potential upside based on the analysts' consensus mean target price of $11.42 for the company. Zynga was trading Wednesday for $4.61, up almost 1% for the day.

Fundamentally, Zynga has few positives. Year over year revenue is down. The company is losing money hand over fist. Zynga's net profit margin is -41.57. That means they almost 1 out of every 2 dollars are lost. Not the kind of burn rate I want to be involved with.

Zynga has a hard row to hoe ahead of it. The company needs to bolster its product line and diversify from Facebook which seems like an insurmountable task. Facebook is fading and will soon be swirling around the bottom of the drain and Zynga will be dragged down with it. Stay away from this catastrophe in the making.


Don't be fooled into thinking you are getting these stocks at a bargain basement price simply because they are down significantly. It makes no difference where a stock has been, it only matters where it's going. As far as I can see the deck is stacked against them. Four of the five stocks are a "No Touch" in my book. If you currently own these stocks cut your losses and move on. Consider buying Apple which is firing on all cylinders.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in 10% at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses further if you wish.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.

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