No Bull: Updating the Bearish Plays, Part 2

Editor's Note: Arne Alsin's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Feb. 22 on RealMoney.

When evaluating stocks, investors shouldn't concentrate on how much they can make. Instead, they should focus on how much they can lose. It's too hard to recoup capital, once lost, to justify taking a chance on a company that's clearly overvalued.

In this column, the second part of my three-part series that updates my bearish columns on specific stocks, are my comments on five overvalued companies. Don't forget to read Part 1 if you haven't already.

Disney

I penned a bearish column on Disney (DIS) last August, when the stock was trading at $26.40. It closed Thursday at $23.73.

Don't Buy Disney, Goofy There's no apparent catalyst to drive it higher

My opinion remains unchanged: Disney is yesterday's story. The last cycle was marked by a handful of richly valued big-cap stocks, like this one, that are struggling in the current cycle. Expect the struggle to continue.

For several years now, Disney has been hindered by an unimpressive balance sheet, paltry revenue growth and operating margins stuck in the low 20s. It's not that I expect the stock to suffer a significant decline; it's just that I can't isolate a catalyst (with confidence) that can drive the share price appreciably higher from these levels.

Apple

iTunes, iPods, iMacs -- there's no doubt about it: Apple (AAPL) makes cool products. But this column isn't about cool products; it's about stock valuation. I see no reason to change my outlook on Apple stock from my October column, when the stock was at $19.19. It closed Thursday at $21.50.

Still Sour on Apple It's valuation that matters, not the product line

No sane investor would pay more than 1 times sales for a computer maker (Apple sells at 1.4 times sales), absent market dominance and compelling growth prospects. Apple has neither.

To its credit, Apple has a ton of cash, with more than $8 per share, net of all liabilities. If Apple management is confident in the company's prospects and if it views the stock as undervalued, then it should use some of that cash to significantly shrink the share base.

Intel

My negative analysis of Intel (INTC) last November is spot on, despite the fact that the stock is now at $29.48 vs. $25.94 when the column ran.

Remaining an Intel Bear There's little revenue growth in sight

Intel is a classic overloved and overvalued relic of the last cycle. A review of historical margins makes it obvious that this company will be hard pressed to earn $1 per share anytime soon. With poor prospects for revenue growth for the next few quarters, I'm not sure why investors grant this company such a rich valuation.

Tyco

In my November column on Tyco (TYC), when the stock was trading at $57.55, I said that "after taking a peek behind the numbers at Tyco, you'll want to run, not walk, away from this stock." It closed Thursday at $28.

Tyco Takes a Plunge This company may be closer than you think to unraveling

I'm puzzled by the aggressive foray into this stock by so-called value investors. And I'm not sure which financial statements Wall Street analysts are reading (or not reading) because some of them are holding fast to projections of Tyco stock at $65 or higher.

With top executives cashing in on stock options without reasonable disclosure, an eight-figure payment to a director for "help" in an acquisition, unreported acquisitions, credit problems, changed business strategy and numerous misleading statements, I can't be confident in the numbers provided by Tyco. I don't trust management, and I don't trust the accounting.

My educated guess is that Tyco is teetering on a precipice. Based on the way I measure cash flow and the debt burden, I think the company is closer to unraveling than people think.

General Electric

I stand by my bearish column on General Electric (GE) in November, when its shares were trading at $39.73. The stock closed Thursday at $37.52.

Not Much Life at GE Warning signs are flashing at its key segments

I continue to think that GE shareholders face a difficult road ahead. I've looked at the company's key business segments, and I see warnings flags everywhere:

• Aircraft Engines (18% of operating profits): Boeing says that aircraft manufacturing will take three years to recover fully.

• Power Generation (21%): Power projects continue to get canceled, now at twice the rate of last year.

• Pension Income (10%): There's no need to comment on this; it's not sustainable.

• GE Capital (41%): More disclosure is obviously needed. With one-third of the growth in this unit coming from acquisitions, I don't have enough data to evaluate the quality of the earnings.

As I said in my original GE column, the company is "morphing" into a financial company. The problem, as I pointed out, is that financial companies don't command premium valuations. In the prebubble days, from 1991 to 1996, GE consistently traded at 15 times trailing earnings, about where better financial companies trade at. The problem for GE shareholders, though, is that sort of valuation would put the stock in the mid-$20s.

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Look for Part 3 of this three-part series in a few days, when I'll update my bearish columns on 3M (MMM), eBay (EBAY), Cisco (CSCO), the Dow Jones Industrial Average and mutual funds.

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