Certain stocks, for one reason or another, are an absolute nightmare for fundamental investors to value. When a company lacks profitability, is undergoing major restructuring, or is growing too quickly to accurately pinpoint future earnings potential, the stock usually trade off of technicals and subjectivity rather than fundamental analysis.
The following companies have these characteristics and are, therefore, impossible for fundamental investors to value. This classification doesn’t necessarily indicate the shares should be sold, but rather treated with caution.
1. Groupon (GRPN)
Although Facebook’s (FB) failed IPO stole the media show in 2012, Groupon’s IPO may have been an even bigger flop. Thanks to a lack of profitability and inability to capture a solid, reliable market majority, the stock has lost around two-thirds of its value since going public.
Groupon’s biggest criticism is that it operates in an industry with no barriers to entry, and therefore faces immense competition from Google, Living Social, Facebook, and soon-to-be public RetailMeNot , among others. Although the company expects profitability next year, the coupon industry could look entirely different in 2014 – and not in a good way. Therefore, the company’s earning potential for next fiscal year is nearly impossible to gauge.
2. Amazon.com (AMZN)
Most would be surprised to hear that Amazon, the world’s retailer, is losing money. In hopes of building a retail and technology empire, the company is spending hand over fist on research, development, and infrastructure, expanding the company’s size but driving profits into the ground. With no end in sight for Amazon’s spending spree, it could be years until Amazon posts a noticeable profit.
While Amazon trades at 2.1 times revenue, a competitive number, investors can only guess where Amazon’s profit margins will stabilize when the company stops its exuberant spending strategy. Thus, the company is almost impossible to value until CEO Jeff Bezos’ grand vision is satisfied. That could be never.
3. Tesla Motors (TSLA)
Tesla, a leading producer of luxury electric cars, has been one of the stock market’s best performers of late. The stock is up 220 percent year-to-date after the company paid back its government loan nine years early, destroyed Model S sales expectations, and posted a surprise profit during its previous quarter. The company also won Motortrend’s Car of the Year Award for its flagship Model S, has other models in the pipeline, and is led by perhaps the most innovative CEO on earth in Elon Musk.
With so many positive catalysts, Tesla deserves a premium valuation on its shares. However, the stock now trades at an astronomically expensive 141.40 forward price-earnings ratio, almost ten times the valuation of the S&P 500. It’s impossible to predict whether Tesla will continue to set the industry standard or if other automakers will inevitably catch up. Thus, Tesla’s long-term growth rate is impossible to predict, and so is its valuation.
4. Best Buy (BBY)
Best Buy, which owns and operates enormous electronic retail stores, has been crippled by the rise of e-commerce. Consumers can now purchase virtually any electronic device through Amazon.com, which offers competitive prices and free two-day shipping for Amazon Prime subscribers. Stiff competition combined with faltering PC sales has sent Best Buy’s stock down 39 percent since May 2010.
Aware that its business model is failing, Best Buy has launched huge cost cutting and restructuring programs. These expensive efforts have flipped Best Buy’s profits to losses, and it’s unclear whether restructuring will ensure the company’s long-term viability. Best Buy, therefore, is impossible to value because investors can only speculate whether the new, more efficient company will be better equipped to fend off Internet competition.
5. American Apparel (APP)
American Apparel, a trendy clothing manufacturer and retailer, hasn’t posted a profit in years. While profitless companies are always hard to value, American Apparel has other bizarre catalysts that drive the stock on a day-to-date basis.
A lack of profitability combined with controversial management (CEO Dov Cherney has numerous sexual harassment lawsuits filed against him) means that American Apparel’s stock price is contingent on the popularity of its fashion lines. The company recently launched successful clothing campaigns like the “Legalize” brand, which helped generate respectable sales growth over the last year. However, an additional lapse in judgment from Cherney or a shift on consumer taste away from the company’s styles could bankrupt the company in the blink of an eye.
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