Notwithstanding the stock market’s March 6 swoon, investors have enjoyed solid profits so far this year. Most stocks have seen their prices rise, with the lowest-quality companies performing the best. Still, companies with problems will eventually see their share prices fall. So now is a perfect time to get rid of the dogs in your portfolio — before they shed their fleas.
We think the stocks of the six companies below are unattractive because they have fundamental problems with their businesses, not just high stock prices. Although a few have already experienced significant share-price declines, we think you should get out now if you still own them. And if you’re an aggressive investor, consider these stocks prime candidates to sell short.
Start with Groupon (symbol GRPN). The Chicago-based daily-deals company has been one of the biggest beneficiaries of the hype surrounding social media. It arranges deals with local merchants, e-mails the bargains to its millions of subscribers, then splits the revenues with the merchants. Groupon’s initial public offering debuted at $20 in November. The stock peaked at $31.14 on its first day of trading, but within a month tumbled below $15. It now trades at $18.13 (all prices are as of the March 3 close).
Groupon may be the first company in this business, but there are no barriers to entry and competition is heating up. In addition to other start-ups, such as Living Social, deep-pocketed giants Amazon and Google have entered the market, as well as big media firms, such as the Washington Post and New York Times.
Groupon’s numbers are starting to reflect the tougher climate. Although its revenues soared 419% in 2011, quarterly revenue growth in North America declined every quarter last year. Operating expenses jumped 149% in 2011, and the company has yet to post a profit.
Most worrisome is the company’s history of using the bulk of early venture-capital funding to buy stock from insiders, instead of investing in the business. That leads one to believe the shares could crater on May 4, when the 180-day lock-up ends and insiders get their first chance to sell stock in the public market.
It’s risky taking on a Wall Street darling, which Salesforce.com (CRM) became after moving into cloud computing, a technology that lets companies access their data from anywhere over the Web. Since November 2008, shares of the San Francisco-based provider of customer-relationship-management software have surged nearly six-fold, to $142.08.
But we see storm clouds on the horizon that many investors are ignoring. For the fourth quarter that ended January 31, Salesforce reported that revenues jumped 38%, to $632 million. That’s not bad. The problem is that operating expenses grew just as fast. Moreover, Salesforce’s balance sheet shows that the company has only enough short-term assets on hand to cover 72% of its short-term debts, suggesting that Salesforce could soon experience a cash crunch.
Much more disturbing is the company’s own view of the future. For the fiscal year that ends next January, Salesforce predicts that revenue growth will fall to 29% from 37% last year. The stock, meanwhile, sells for 90 times the $1.60 or so per share that Salesforce forecasts it will earn in the January 2013 fiscal year. Investors may well have their heads in the cloud to award Salesforce’s shares such a stratospheric price.
For the other four stocks go to Kiplinger.com.