4 of the Scariest Stocks to Own
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the traditions for Halloween each year, among many, is watching horror films. I don’t think you need to rent any movies or go to any theaters to watch some of the scary situations that are currently happening to some popular companies and their stocks.
Dell – Computer Hardware (Technology)
It is estimated that there will be more than 2 billion PCs in use by 2015, as Forrester Research currently reports. Computers sold this year alone, worldwide, will be close to or over 300 million by the time you read this article. However, Dell’s (NASDAQ: DELL) market share in the computer business is slowly fading away and will continue to do so if things don’t change in the computer market or at Dell. Dell led the PC market globally in 2005 with 16.8% of the market share. In 2011 it had fallen to second place at 12.1% and as of today, it is now in third place. Dell’s revenue and EPS have declined year-over-year and their net profit margins went from being consistently over 6% between 2002 and 2006 to now falling in the 4% range on average since.
Dell has seen its share price drop over 68% the past 10 years. Nearly every year, their reason is always increased competition in some way or form. In my opinion, it is because Dell has done little to change. They still are still primarily known as a retail computer business that puts together computer parts from several vendors and brand the result as their own. They also still carry around with them the reputation of having sub-par customer service.
As of the last earnings report, Dell has few positives in any of its divisions. Large Enterprise, Public, Small and Medium Business, and Consumer segments all saw operating income drop significantly or rise negligibly with the Consumer segment taking an 86% hit – all year-over-year. On a side note, I find it interesting how in the latest report, 86% is shown only on the table but is skipped over in the text. The 22% drop in net revenue is discussed within the Consumer segment section, but in my opinion, operating income – the amount of profit realized from business operations after taking out operating expenses – is just as important.
Dell lately has been trying to diversify and it is true that larger revenue streams come from Large Enterprise and Business segments. However, even in these servers, software, and services related parts of the business, Dell is still seeing percentage drops year-over-year.
Dendreon – Biotech & Drugs
I’m not sure which is scarier, the fact that Dendreon’s (NASDAQ: DNDN) prostate drug, Provenge, cost $93,000 per treatment, the idea that Provenge extends median survival rates by just over 4 months, or that thousands of investors actually thought this stock was profitable long-term and invested greatly into the hype. They say that human life is priceless, but I’m not sure if suffering from any cancer, let alone prostate cancer, for 4 more months on average, is worth $93,000 or more.
The share price fluctuation of biotechs like Dendreon is what is truly scary. Many new investors will turn to this sector just because of stories like Dendreon. From March 2009 to July 2011, Dendreon was a superstar going up over 1450% in share price with analysts on TV and online saying weekly how the sky’s the limit for this “groundbreaking” stock. However, even with the over two-year pop in share price, the stock has dropped nearly 50% the past 5 years overall in share price. So if you were an investor that believed $30-40/share from the $6-7 range in 2007 wasn’t good enough for you to sell, then you would have seen your shares cut in half as of today.
Whether or not the rescheduled earnings results this Friday, Nov. 2, create a pop or drop, long-term, Dendreon in my opinion has a weak future.
Green Mountain Coffee Roasters – Food Processing
A couple of weeks ago I saw a new commercial for the Verismo. It is a consumer-grade single-serve coffee machine that uses sealed plastic cups for coffee grounds, and a “milk pod” for lattes. It fits on a kitchen countertop and appears very easy to use. However, this section of the article is about Green Mountain Coffee Roasters (NASDAQ: GMCR) and they didn’t make the Verismo – Starbucks does.
Times sure change fast in the coffee business. Like the coffee itself, when it’s just hot enough, anything can happen. However, when things get cold, the taste sure gets stale in a hurry. People blame David Einhorn for bashing GMCR since last October and have placed him as the catalyst for why the stock has dropped over 70% since that time. However, I say that Einhorn simply laid GMCR out on a silver platter for those investors unaware of how competition rules and how low-priced competition, in particular, destroys companies like GMCR.
There seems to be confusion with the GMCR CEO Larry Blanford and what I find scary is how someone like him can ignore the future so blatantly and run a business as big as GMCR. The single-serve coffee system isn’t that revolutionary. I was at a hotel this past weekend that had a single-serve coffee system that was neither GMCR nor Starbucks related. It was just a cheapo hotel version where you slid a tray (not a closed cup) with a closed single-serve coffee packet into the bottom and it produced one cup of coffee. In my opinion, GMCR’s gas tank has been on E for quite some time and it will be sooner than later that its Keurig machine and the business model runs out of gas – or coffee.
hhgregg, Inc. – Retail
hhgregg, Inc. (NYSE: HGG) has seen its share price drop over 54% the past year and drop over 75% since mid-2010. The big box retailer, which is often compared to Best Buy or Circuit City, looks like it is following a similar fate to the enemy of online options that consumers are drifting towards. HGG isn’t surprising anyone lately either. In the past 3 quarters, their EPS has nearly matched analysts’ estimates. Estimates, by the way, weren’t exactly for the positive side either. For December 2011, March 2012, and June 2012, the estimates were $0.60/share, $0.37/share, and -$0.16/share, respectively. Analysts missed the March 2012 by $0.02 when HGG beat with $0.39/share. It is still pretty scary when analysts call for your company to decline that much in a short time and you can’t do much more than match them quarter for quarter.
Some people want to brag about how HGG is expanding where some expansions are into old Circuit City locations. I can’t recall a time when expansion was the cure for a big box retailer – especially into ex-locations of a previous store chain that went bankrupt relatively recently. In the latest earnings report, HGG states that the increase in net EPS loss is due to comparable store sales decrease of 5.1%, and increase in advertising and SG&A expenses, and a slight decrease in gross profit as a percentage of net sales.
In the end, what may be most scary is how a brick-and-mortar store like HGG has little chance of competing in an online world. The fate of HGG could influence how people shop for decades to come and may persuade future entrepreneurs from avoiding the brick-and-mortar business model altogether.
For the most part, most consumer products can and are being bought online at places like Amazon, and other online sites that are just online versions of current stores, with the exception of food (grocery stores and restaurants), hazardous chemicals (gasoline) and larger items like cars and houses. Imagine a world where the only people out on the streets are those that are hungry, running out of gas, or stressed out looking for a new car or house. Now that is scary.
Interested in Additional Analysis?
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mikecart1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Dell, Dendreon, and hhgregg 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 Dell, Green Mountain Coffee Roasters, and hhgregg. 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.