Three Beaten Down Consumer Names
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I think that it goes without saying that every investor needs to have a watch list. It enables you to take a step back and avoid the temptation of buying a stock the moment it catches your attention. I’ve been building a watch list of high growth companies to invest in with income generated from a paper trading portfolio I’m calling the “No Drip, No Mess” Portfolio. Today I’m adding three beaten down consumer names to my watch list. I’ll be watching to see if these companies are beaten down for good reason, or it there might be an opportunity for multi-bagger returns.
Blue Nile (NASDAQ: NILE) is a company I’ve frustratingly owned for a long time now and had such high hopes for the business model. They were hit hard during the recession and have never recovered. Earnings have fallen by an average of three percent per year for the past five years while revenue has grown by just four percent a year over the same time frame. They’ve been hit by increased commodity costs which have crimped margins. Further compounding execution problems have been the revolving door in the C-Suite. Despite being down nearly 20% over the past three months the company is still fairly expensive at 32 times next year’s earnings. I’ll be watching to see if the company can turn it around and begin to grow sales and profits.
Shares of Green Mountain Coffee Roasters (NASDAQ: GMCR) have been hit hard the past three months, down nearly 60% after missing their earnings last quarter. While Blue Nile’s expensive at 32 times earnings, Green Mountain appears cheap at just 8.5 times earnings and if you look out another year that drops to just 5.9 times. The real question is if the company is a true value or a value trap. The company is facing mounting concerns that they are being aggressive with their accounting and that their looming patent expiration on their k-cups will really hurt their business model. The company has been spending aggressively to expand their capacity and doesn't currently generate any free cash flow. Finally, Starbucks (NASDAQ: SBUX) is both a partner and a competitor leaving investors unsure where their loyalties really lie. I’ll be watching their next quarter to see if business is really slowing down.
When you’re in a business that lives and dies the keeping your customer’s happy, it is usually not a good idea to upset them on a regular basis. Unfortunately for Netflix (NASDAQ: NFLX), they’ve been doing just that. When you upset your customers you end up upsetting your shareholders and for Netflix they’ve done that to the tune of a 24% drop over the past three months. The biggest thing to watch is if sales are now in a permanent slowdown or if they’ll be able to restart the growth engine. Their streaming division is facing threats from numerous competitors with Amazon (NASDAQ: AMZN) being among the most feared as their Prime membership. I’ll be watching to see if Netflix can regain their dominance or if Amazon is going to send them down the river.
Both Blue Nile and Netflix are coming under increasing pressure from Amazon’s dominance and under another title they’d be a company to add to the watch list. I’m most intrigued by Green Mountain, the company is either 90% undervalued (if you look at where it was trading earlier this year) or it is a value trap heading for bankruptcy. More than likely the truth is somewhere in the middle but I’d still like to see another quarter or two from the company before committing any capital to the name.
Do you have a beaten down consumer stock that you think I should be watching? Sound off in the comment box below.
latimerburned owns shares of gmcr (bear put spread), Green Mountain Coffee Roasters, and Blue Nile. The Motley Fool owns shares of Amazon.com, Netflix, and Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Amazon.com, Blue Nile, Green Mountain Coffee Roasters, Netflix, and Starbucks. 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.If you have questions about this post or the Fool’s blog network, click here for information.