5 Dangerous Stocks To Own

Posted by Bigtrends on October 14, 2014 7:05 AM

5 Dangerous Stocks To Own
These stocks may go over the cliff

by Julian Close

Confession: I love these little stock market dips. I love it when the chorus of the eternally wrong sings of our inevitable doom. I love it that I have a chance to be in a minority opinion that inevitably turns out to be correct. Mostly, I love it that the stock market has a chance to reshuffle the deck, for I long for the dissolution of the false merit conferred upon some stocks by their lofty price. Only fundamental value, here and now value, can stand strong during such times, and it is after the equalization of such reckonings that the truly meritorious emerge. The sentiment was probably best said by Arragon in Shakespeare's Merchant of Venice:

Let none presume
To wear an undeserved dignity.
O, that estates, degrees and offices
Were not derived corruptly, and that clear honour
Were purchased by the merit of the wearer!
How many then should cover that stand bare!
How many be commanded that command!
How much low peasantry would then be glean'd
From the true seed of honour! and how much honour
Pick'd from the chaff and ruin of the times
To be new-varnish'd!

I see no reason to think any of the following stocks stand to gain from a reevaluation based on merit.

GoPro (GPRO)

GPRO Daily Chart
GPRO
 

This is a weird one, because I love GoPro's cameras. When it becomes important for me to show the world what my headquarters and/or lair look like from the air with a camera affixed to my drone aircraft, GoPro is definitely the company I'll call. I also have no problem with the company's management. I believe the company's implied path from hardware company to media giant is pure PR fiction, but the company has the right to tell the market its dreams, and the market has the right to buy into them if it wishes.

The only thing wrong here is the price. The company's trailing P/E is 284, and even its fiscal 2015 P/E is 86.45. The Street is saying, and I'm putting this in very broad terms, that the company will be making about ten times as much money in just a couple of years. It's a valuation that occasionally makes sense - particularly for rapidly growing social media companies, or biotechnology companies that make a breakthrough - but why for GoPro? The company is already the biggest player in what remains, essentially, a niche market.

GPRO began to rise somewhat inexplicably in August, then lost 10% of its value in last week's downturn and now trades at $89.16. It has more reason to drop back into its old range below $50 than it does to climb from here to $100.

Oracle (ORCL)

ORCL Daily Chart
ORCL
 

Thump! You just heard the first drop in what I will believe will be a long series of many such drops for Oracle software. Poor Oracle has lost its founder and (loud) mouthpiece, Larry Ellison. This comes at a bad time, as the company's revenue growth has slowed to a trickle - just 4% per year. Aside from the obvious fact the company is making less money, this slow growth has another serious drawback: it means most companies that use Oracle are using older versions of its software that are quickly growing obsolete. While Oracle's traditional rival, SAP (SAP), is in little better shape, it is facing a serious threat from Salesforce.com, which has seen explosive growth this year.

Oracle's software is a patchwork of cobbled together programs, many of which were made by entirely different companies. It is essentially unfixable, and Oracle's only real growth strategy consists of buying still more small software companies so they can kill them, cut out the parts they want, and add them to their creature. Faced with upgrading, as so many business will be over the next 18 months, why would anyone choose more of this, when it looks like the wind is now blowing so strongly in the other direction.

Transocean (RIG)

RIG Daily Chart
RIG
 

Question: what do you get when you sell your most profitable assets to the market? Answer: a bunch of cash to drive up your numbers today, and lower earnings potential going forward. Transocean is in the offshore drilling rig contracting business, which means it operates the behemoths that pull up oil from ocean depths in excess of 4,500 ft, or even 7,500 ft. Though a major player, the company basked in relative anonymity until April of 2010, when an explosion destroyed its rig Deepwater Horizon, killing 11 workers and creating an underwater oil spill that continued to spew oil into the Gulf of Mexico for months.

Transocean was eventually found negligent, but not grossly negligent, meaning that it will not have to pay punitive damages. Even so, the cost was huge, and to bear it, the company recently spun off an LLC, gaining $350 million in the process, but giving up 49% of the profits from three lucrative rigs. The real problem today, of course, is that the big six oil companies are now finding themselves over-invested in offshore rigs at a time when cheap US shale oil is re-writing the rules of the world energy market. This company is on the wrong side, not only of history, but of technology.

TransCanada (TRP)

TRP Daily Chart
TRP
 

TransCanada, as you probably know, wants to build a pipeline across America. There are plenty of reasons to disagree with Obama policies, but it is extremely disappointing to see a company with nothing to offer make so much hay off of supposedly being an Obama "victim."

The southern leg of the infamous Keystone XL pipeline has been built, and the northern leg has not. Once you toss out the politics, it becomes almost indisputable that the southern leg, which transports some of the cheapest and best - and certainly most abundant - oil on earth, West Texas Intermediate crude oil, from Oklahoma to refineries on the Gulf Coast is something that should exist, while the northern leg, which would transport horrific heavy-bitumen tar-sands from central Canada to the Gulf Coast, should not. With apologies to those who have been sold on the idea that this is a good business venture that is only held up by politics, it's nonsense. American oil is better, cheaper, abundant and above all already here. This project offers no conceivable benefit to American industry.

TRP stock was trading at $56 last month, and various reports are claiming that it could become a target for activist investors, but I don't buy it.

Activist investors like to make money. Do you really think they are on the prowl for oil companies right now? In other news, the company is claiming it will build a new pipeline - one that carries oil trans-Canada, as its name implies, to refineries in eastern Canada. Good for them, but their version of "oil" still costs too much to refine, and causes too much environmental damage to be very attractive to global buyers.

VipShop Holdings (VIPS)

VIPS Daily Chart
VIPS
 

To be clear, I would certainly have negative things to say about a stock if it were 10% overvalued, but that isn't the reason I went negative on VipShop holdings back in August. No, that was more like a case of a stock being 50% or more overvalued. That's another way of saying that my opinion on this stock has in no way changed based on its having fallen by 10% since then.

The objection here is mostly a common sense one: a $10 billion company can't spring up in a matter of months having created a sustainable business in the process. The gaps in infrastructure, hierarchy, corporate culture, etc., must be staggering. Also, the company's business is purely as agent, linking consumers to discounted retail products online - there is virtually no barrier to entry.

While I don't usually repeat the opinions of dissenting analysts, I'll point out in this case that I'm taking the diametrically opposed viewpoint to Jim Cramer, who's enthusiasm probably helped to propel this stock to its recent heights, and who still has it in his Fantasy Stock Portfolio. I respect the guy, but I'll say his fantasies are a lot weirder than mine.


Courtesy of MarketIntelligenceCenter.com

 

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