How much of a risk taker are you? Are you a contrarian at heart? A die-hard optimist when it comes to certain brands? Your willingness to bet on the following 10 stocks -- magnets for debate among analysts and investors over the past year -- might inform your answers.
Research In Motion (RIMM)
Gone are the days of BlackBerry-or-bust, when every enterprise in town equipped employees with the addictive black smartphone. Lately, Research In Motion’s stock price has hovered around a six-year low. In its latest earnings report, RIM said it expected revenue of between $4.6 billion and $4.9 billion, lower than analysts' already low expectation of $5 billion. The company also announced it planned to ship between 11 and 12 million BlackBerry units, where analysts were hoping for 13 million. Citi analysts reacted to the report with a "sell" recommendation, and predicted that RIM would miss targets for both holiday sales and back-to-school 2012, according to the Wall Street Journal.
Does management even know what’s happening? Not so much, according to a letter written by a “high-ranking employee” bemoaning that management is “disconnected with the realities of the mobile industry” and “out of touch with how low the morale of its employees has dipped,” according to CNET.
Instead of launching new smartphones during the first six months of 2011, RIM concentrated on its PlayBook tablet, which failed to the tune of $485 million in losses. RIM isn’t offering a much-needed tablet OS upgrade until February 2012, instead favoring extracurricular activities like helping police hunt down British rioters. Perhaps RIM’s upcoming BBX mobile platform will be a hit, but, given its recent track record, that’s a questionable bet.
Focus Media Holding (FMCN)
If you see a flat-panel LCD ad in China, chances are the screen is owned by Focus Media Holding Ltd., China’s biggest lifestyle-targeted digital media company. But if a recent independent investigation of the advertising giant holds water, FMCN’s ads might as well be saying “We lied.”
The research firm Muddy Waters issued a critical report in November 2011, accusing Focus Media of a host of fraudulent activities, including overstating the number of LCD screens it owns by 50%, claiming to own and “dispose of companies it never actually purchased,” writing down more than 20 acquisitions to zero and giving them away, and insider trading to the tune of $1.7 billion.
After Muddy Waters released the report, rating the stock a strong sell, FMCN stock fell 40%. Focus Media officials wrote an elaborate rebuttal to Muddy Waters’ report, so the question of corruption hasn’t yet been settled. Still, for the time being, Focus Media has put a spotlight on cronyism in China; the fallout remains to be seen.
Jefferies & Co. (JEF)
When MF Global (MFGLQ) made $6.3 billion in repurchase agreements (repos) with indebted European nations, including Ireland, Italy, Spain, and Portgual, it was, despite the European disaster, supposed to be a low-risk investment. It appears, however, that MF Global’s counterparties reneged or made untenable demands on the agreements, according to the Financial Times. As a result, MF Global, facing a liquidity shortfall, used more than $890 million in segregated customer funds to cover its losses -- and then filed bankruptcy. Customers, needless to say, were not happy.
That brings us to New York-based investment bank Jefferies & Co., which, like MF Global (a former investment), has exposure to European debt. Amid investor jitters, the company disclosed that its net European exposure was only about $90 million, and that it does not have any repo-to-maturity activity. After the MF Global fiasco, Jefferies also diminished its sovereign debt holdings in Italy, Ireland, and Portugal by nearly 50%, according to Sumfolio.
This week Jefferies released an earnings report that reassured investors: the firm had cut exposure to European sovereign bonds by $4.3 billion, or 82.5%, since early November, according to Reuters. Although the company paid for the defensive moves, reporting weaker profits and revenues, investors welcomed the decision to reduce risk. The stock price rose nearly 23% in trading the day earnings were announced.
In the third quarter of this year, Netflix knocked the wind out of its own sales by increasing the price of its combination streaming movie and mail-in DVD service by 60%. As a result, 800,000 users canceled their subscriptions. Netflix then added to consumers’ ire by limiting its streaming media to one device at a time. Netflix stock, which had enjoyed a two-year climb from the beginning of 2010 to a peak of more than $300 per share in July 2011, has nose-dived to around $70 per share.
While this means a saner price-earnings ratio than July’s 80, the mail-in DVD company still faces substantial threats. For one, big-name competitors like Apple (AAPL) and Amazon (AMZN) have caught up with Netflix’s formerly unique business model and are nipping at market share. There are rumors of Netflix selling its streaming service to the highest bidders, and additional rumors of a Securities and Exchange Commission investigation. Where is this all going to end up? At present, it seems as though even management doesn’t know.
Green Mountain Coffee Roasters (GMCR)
Greenhorn Capital hedge fund manager David Einhorn, whose fund enjoys a 25% average return, is best known as the guy who shorted and publicly denounced Lehman Brothers in 2007. Will Einhorn’s latest target, Green Mountain Coffee Roasters, end up as a horticultural Lehman?
In his presentation, Einhorn made the case that Green Mountain not only has an unsustainable business model, but that something smells like a rat in Keurig-land. In Einhorn’s analysis, the company’s lack of transparency and disclosure, “peculiar relationships with quasi-captive distributors” that led to inflated sales numbers, and heavy insider sell-offs smack of funny accounting. Green Mountain CEO Larry Blanford denies it all.
Whether GMCR is a good bet remains a heavily disputed topic. At one point, Green Mountain had beaten analyst quarterly estimates by 10% to 36% over the year, as the Motley Fool’s Rick Aristotle Munarriz noted.
Einhorn himself remains short GMCR, for reasons that won’t play out until next year. Although his investors already celebrated one victory this fall when, as Minyanville's Michael Comeau reported, Einhorn's "very ugly and very public campaign against Green Mountain Coffee Roasters culminated in a massive gain for his investors as the former momentum favorite crashed and burned." In the November report, earnings came in at $0.47 a share, beating consensus estimates by a penny, and revenues rose 91% to $712 million, missing Wall Street's expectations by about 6%. (See Green Mountain: Cheap for All the Wrong Reasons.)
Only time can tell what will happen to this once caffeinated stock.
If Salesforce.com’s P/E ratio of more than 400 doesn’t make you blink, the fact that account receivables are growing at 300% of revenues should. Those seven insider sell-offs during the past two months might also give you pause.
The enterprise cloud computing application provider has one of the most overvalued stocks on the market, and executives seem to know it. Company execs have been taking less compensation in stock and more in cash of late. The question seems to be not if Salesforce.com’s stock will drop, but when it will happen -- and how the company will handle it.
First Solar (FSLR)
Thanks to China’s entry into the solar panel manufacturing industry, the volume of solar panels produced has increased threefold during the past three years. Panel prices, meanwhile, have decreased 43% this year, according to a Bloomberg BusinessWeek report. As a result, First Solar, the nation’s largest solar company, had to change its strategy, shutting down research into Solyndra-like material in favor of developing a utility-scale project niche, the report writes.
And there’s more trouble on the horizon. First Solar has an oversupply of photovoltaic products, which it must now sell for less, and CEO Rob Gillette stepped down in late October without stating a reason. Zacks has given the stock, currently at a four-year low, an underperform rating. All this for a company Forbes ranked as one of America’s fastest-growing technology companies at the beginning of 2011.
Although the daily-deals trailblazer has an enviable 115 million or more subscribers, with a 2011 loss of $633 million, each of those subscribers costs Groupon roughly $5.50. Where has all the cash gone? To marketing, according to Seeking Alpha’s Colin Lokey: Groupon has siphoned $466 million in an effort to draw in more subscribers. Yet only about 25% of those precious subscribers have bought coupons from the site, Lokey writes. Moreover, businesses are starting to realize that Groupon isn’t all that and a bag of chips, for various reasons, not the least of which is that Groupon takes around half the revenue from a deal. Groupon’s local deals revenue fell by 3% last quarter. So far, the company has been propping up its stock value through insanely low float -- only 4.7% of its shares are being sold to the public -- but with online giants like Google (GOOG) and eBay (EBAY) now in the daily deals fray, Groupon’s long-term value is up for grabs. (See Groupon is Effectively Insolvent.)
Although FarmVille developer Zynga raised $1 billion in its recent IPO, the largest amount since Google went public, its much-anticipated first days of trading were less than overwhelming. That must be a real sore point, considering the company “did anything possible just so that we could grow and be a real business,” as CEO Mark Pincus said in a Startup@Berkeley speech.
By “a real business,” Pincus presumably means treating employees poorly enough to face an exodus of talent, being steadily embroiled in accusations and cross-accusations of copying games, and recovering from an advertising-based revenue model that included scams. Perhaps the most important question, however, is whether Zynga is sustainable as a business. A creator of simple games that piggyback on Facebook depends on two things. One, that users won’t get bored with those simple games (or that Zynga can branch out, as it is currently trying to do), and two, that Facebook itself doesn’t bomb.
While Nokia is still the world’s largest cellphone manufacturer by volume, the almighty revenue crown belongs to Samsung now, and Nokia shows few signs of catching up. Nokia sales have fallen 13% year-on-year. The company posted two successive losses in 2011, and continues to lay off employees, including 3,500 global workers this past September. There are rumors of a Microsoft (MSFT) takeover: For higher-end devices, Nokia has forsaken its Symbian operating system in favor of the Windows phone, for which it pays royalties. And in emerging markets, which Nokia depends on for profits, low-cost competitors are eating into market share and margins. Ratings agency Fitch downgraded Nokia to a BBB- credit rating, one tier above junk bond status.
Nokia hopes to make up for its losses with new products, including the well-thought-of new Lumia smartphone series. And in the third quarter of this year, Nokia showed signs of recovery in the low-end feature phones market. Is the cellphone maker a falling star or will it nest in a new niche? Only time will tell.
by Drea Knufken
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