4 Stocks I Don’t Want to Own in July

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earnings are the single greatest catalyst for stocks, and in this piece I am looking at five stocks that could see significant volatility with earnings in July, presenting too much risk for me.

#4 Unrealistic Expectations?

Netflix (NASDAQ: NFLX) is one of the market’s “cult stocks,” a very volatile name that has rallied 250% over the last year. During its last quarter, the stock surged more than 25% after beating expectations and posting top-line growth of 17%.

Now, the stock is significantly more expensive at 3.15 times sales with a forward P/E ratio of 73; and expectations have slowly crept higher. This is a company that has seen a great deal of subscriber growth, but various analysts including those at Bernstein are saying that subscription growth expectations are now unrealistic.

Therefore, while I do like the direction of this company long-term, I think its gains and valuation present a great deal of risk heading into earnings on July 24, and I would not own the stock.

#3 Several Warning Signs

Green Mountain Coffee Roasters (NASDAQ: GMCR) and Netflix are joined at the hip, despite trading in two different industries, as bullishness for one often reflects well on the other. Green Mountain is yet another cult stock, meaning it’s a stock where irrational exuberance often occurs abruptly and without warning. For this reason, you have to be worried into earnings on July 29.

Like Netflix, Green Mountain has seen massive annual gains, up 255%. The company has seen strong gains as coffee prices have hit a 47-month low, but many analysts now predict that this trend will soon reverse, increasing Green Mountain’s costs.

With very similar growth to Netflix, the factor that makes Green Mountain riskier is that 33.9% of its float is short, compared to 20% for Netflix. Moreover, insiders have sold about a million shares this year, while buying none. Combined, I view these factors as risky, and would be very careful with this stock. 

#2 Keeping My Fingers Crossed

There is no company that I’d like to see crush earnings expectations more so than YRC Worldwide (NASDAQ: YRCW). The stock is higher by 330% over the last three months, after the company posted its first operating profit in a decade during its last quarter.

Expectations are now sky high for YRC Worldwide to repeat with similar performance on July 29. In terms of valuation, YRC Worldwide is the cheapest in the entire transportation sector, trading at just 0.05 times sales.

If the company can repeat with a strong quarter this month, it could trade considerably higher. Personally, I am keeping my fingers crossed, and want nothing more than to see this company prove all the naysayers wrong with another great showing.

However, if fundamental weakness is shown, then YRC Worldwide could lose a great deal of value. This is a stock that’s still down by 99% over the last five years, and investors are still highly skeptical. To me, this equals a great deal of risk. Thus, I’d be very careful and would expect a quite volatile month.

#1 Time to Back up the Bullish Sentiment

Alright, Tesla Motors (NASDAQ: TSLA) began its three month 165% gain with earnings, and now it has to live up to the high expectations that have been set.

This is an automotive company, and contrary to popular belief, the Chevy Volt and Nissan Leaf have comparable sales to Tesla’s Model S. Yet, with an operating margin of negative 33%, 12 month sales under $1 billion, and a market cap of $13.5 billion, Tesla has been granted an excessive valuation relative to its peers.

Consider the fact that Ford is also growing its revenue by double digits year-over-year and has a market cap that is less than five times greater than Tesla, yet has revenue that is 137 times greater! These metrics don’t add up, and this is the primary reason that 32% of Tesla’s float is short.

Tesla CEO Elon Musk has made big claims over the last few months, guiding for sales of 200,000 units within three to four years. Now, the company has to back its claims with fundamental improvements. With it being so much more expensive than other auto stocks, I view it as the highest risk this earnings season and would not want to own it on July 22 when it reports.

Final Thoughts

With earnings season around the corner, there are going to be a lot of market leaders to reverse their trend. Conversely, a lot of market laggards will reverse to trend higher.

Theoretically, a stock is valued on expectations and fundamental data. As expectations rise, a stock rises as well. When fundamentals fall, the stock will fall until reaching a point where expectations and fundamentals align.

For these four companies, I fear that expectations exceed fundamentals, and that can prove troublesome for many investors. 

 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, Netflix, and Tesla Motors . The Motley Fool owns shares of Netflix and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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