Rip Van Winkle Nightmare Stocks

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

The story goes Rip Van Winkle slept for 20 years after bowling and getting drunk. Quite a night, Mr. Van Winkle. The Washington Irving tale has become a part of American culture. If you fell asleep 20 years ago and woke up today you might be surprised that Bank of America dropped below $10, that Apple hit $700, and that the Dow, which was at 3,050, hit over 13,000.

Warren Buffett once said: "Only buy something that you'd be perfectly happy to hold if the market shut down for ten years." Why not 20, Mr. Buffett?

If you took a Rip Van Winkle nap tomorrow, which stocks would give you nightmares? No one would have thought 20 years ago that Eastman Kodak would file for bankruptcy protection, but now film is as dated as the President's "horses and bayonets."

Gone in 20 Years?

Let's look at a few candidates. Will these companies exist in 20 years? Best Buy (NYSE: BBY) is the most discussed lately with its founder Richard Schulze's attempt to find backers for his bid for the company. Best Buy has a negative EPS (-$3.36) and a yield of 5.30%. It just accelerated its dividend with an ex-dividend date of Dec. 7.

On Dec. 4 numbers came out for Black Friday sales from NPD, and consumer electronics were down over 5%, especially in the TV and laptop categories. The"showrooming" effect which has been a money maker for (NASDAQ: AMZN) is a deal breaker for Best Buy investors.

If Best Buy can't make money on Black Friday then when? Analysts expect negative growth (-8.24%) for the next five years. The last analyst upgrade was in December 2010 by Standpoint Research. Finally, with free cash having been used for share repurchases, unless an investor is willing to take the risk that the company can turn around and maintain the dividend, there's just no reason to be in the stock, certainly not over 20 years.

Its cohort in consumer electronics, Radio Shack (NYSE: RSH), fared even worse on Black Friday according to a research note from Deutsche Bank with less than 20% of their stores busy on Black Friday compared to 86% at Best Buy. Radio Shack is trading today at $1.93, pennies above its 52 week low. With EPS of -$0.76 year to date, I thought Fool Joshua Rubin's comment on Radio Shack summed it up nicely: "Walk around the office and tell guys, "Hey, I'm thinking of shorting Radio Shack" and you'll get the same response every time, 'They're still in business?' They are the Abe Vigoda of business." No disrespect to Mr. Vigoda. He was a fine actor in his day.

The analyst growth estimate for the next five years is -107.90%. Yikes! The short interest stands at 37.90% and that's been the winning trade this year with the stock down some 83.07% over 52 weeks. The profit margin is -1.48% and the return on equity is -8.78%. The gadgets and gizmos that Radio Shack sells at its over 6,000 venues just aren't moving despite its recent deal with Target to sell some of its products there.

Radio Shack was founded in 1899 and just can't seem to make a go of it in the twenty first century. Willl it still be around in 2032? Unlikely, I'm afraid.

Are Books Cooked?

Then there's Barnes & Noble (NYSE: BKS), another player in a dying industry, bookstores. While it has the Nook e-reader, competition with Amazon has taken the stock from a high of $26 in May only to fall back to below $12 in September. The EPS is -$1.08, the profit margin is also negative at -0.62% and it sports a negative return on equity of -4.35%. With 689 bookstores and 667 college bookstores, one might think it could make money, at least in the college bookstores (have you bought a college textbook recently!?) and its Nook Study, e-textbook site, but even the demise of Borders isn't really helping them out.

It does have an e-book platform aligned with its Nooks but it's not nearly on the scale of Amazon. Once again Amazon is the silent killer affecting them and Best Buy.

Barnes & Noble seems to be the healthiest of these three, all things being equal. It did surprise by 33% in its October earnings release but the analyst growth rate predicted for the next five years is worse than the other two at a -167% growth rate.

The multi-year trend away from physical books was also mentioned in the Kleiner Perkins Caufield Byers 2012 Internet update (slide 62) as an asset-heavy trend (i.e. shelves upon shelves of books) to an asset-light one (e-reader). But that e-reader is not necessarily a Nook.

Lastly, negative sentiment is growing with the short interest here now at 32.70%. If Barnes & Noble survives to 2032, the company will probably be vastly different.

The Nightmare Before Mid-Century

These three names are definitely in jeopardy. If you are a Buffett aficionado then you cannot be in these names. You reply: Why not be greedy when others are fearful (as Warren also famously said)? But these companies are on the wrong side of multi-decade trends and barring drastic transformations are nightmare stocks. Wake up and smell the coffee, Rip! Don't buy these before you doze.

leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of and Best Buy and is short RadioShack. Motley Fool newsletter services recommend 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!

blog comments powered by Disqus