The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Small-cap companies can be some of the most innovative and profitable on the market and can bag you big gains. But if you pick the wrong ones and end up with an earnings dud, you can do some serious damage to your portfolio.
Today, I have
for you that you should sell ahead of the companies' earnings announcements this week. These companies are finding it hard to make a profit and are only marginally growing sales or seeing business go to other competitors. This is not the type of movement I like to see in my stocks and whenever a company with these fundamentals pops up on my screen, I immediately send it to the trash.
OM Group Inc. (OMG)
OM Group Inc.
is a producer of cobalt and metals-based powders and specialty chemicals that is seeing very erratic earnings and revenues. While earnings for its industry are forecast to grow 35% this year, earnings for the company are likely to drop by 6%. There are some signs that operations are recovering, but this is the part of the stock market cycle where stocks with stellar earnings tend to outshine those with mediocre ones. Shares have been lifted by the hope that the company has a division supplying chemicals for lithium-ion batteries used in cellphones and electric cars. But that division accounted only for a tiny part of overall sales and it could be years before it becomes an earnings driver. It looks like more bark than bite with OM Group.
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California Pizza Kitchen (CPKI)
California Pizza Kitchen
( CPKI) is neither here nor there when it comes to the restaurant business as it operates or franchises a chain of casual dining restaurants principally in the United States that focus on pizzas, pastas, salads, and other Italian specialties. The pizza business is a crowded field and high gas prices and weak employment are deterring consumers from eating out. This is why earnings for the company are forecast to rise only 6% this year while earnings for the industry will grow 21%. With such mediocre earnings growth the shares are likely to underperform for the rest of 2011.
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Caribou Coffee Company (CBOU)
Caribou Coffee Company
( CBOU) is trying to compete with
, but it does not have either the marketing muscle or the financial backing in order to succeed in overcrowded field. Starbucks itself had to close underperforming stores and is seeing huge competition in NYC from privately-held
. Caribou does not do much to differentiate itself from the competition, which is why earnings are forecast to drop 20% in 2011 while the industry is slated to grow by 28%.
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is fighting for relevance in the fast-changing technology sector. It used to be a pioneer in the digital audio business with network-delivered digital media products and services worldwide. Its goal is to enable the creation, distribution, and consumption of digital media, but it has been squeezed by leaders in the field like Adobe and Apple. It seems too small to survive on its own and is currently losing money. The company is forecast to make no money in 2011 or 2012. It might be a takeover target, but this is a very long shot not worth taking.
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Kite Realty Group Trust (KRG)
Kite Realty Group Trust
is a small-cap real estate investment trust (REIT) with uncertain payout in the struggling retail space. There is an oversupply of retail space in the U.S. due to consumer retrenchment and the popularization of online purchases. The company has been reporting flat funds from operations results -- the better way to gauge REIT's profitability than earnings -- in a recovering economy. The question investors have to ask themselves is if you can't make money when the economy is improving, what would happen if the economy deteriorates? You should definitely stay away from this stock.
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Cincinnati Bell Inc. (CBB)
Cincinnati Bell Inc.
is a communications company that provides voice and data services over wired and wireless networks. The company is a traditional telecommunications company that is finding it hard to compete in a world with an ever evolving telecommunications industry. Once upon a time, telecom stocks used to be sure-bets for profits. Nowadays, however, only the largest and the most innovative companies will bring you profits and this is not one such company. CBB is expected to post earnings of 6 cents per share, a 50% year-over-year decline, and only moderate sales growth. The company has disappointed in the past two quarters, so I'm not expecting a surprise to an upside this time around.
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Chiquita Brands International (CQB)
Chiquita Brands International
has one of the most recognizable brands in the world, but you'd never find this stock on any analyst's buy list. The company distributes bananas and has also branched into other food groups, like salad, healthy snacks and other produce. While the health foods movement is gaining traction, this company is barely breaking even with sales. Its revenues are expected to decrease slightly year-over-year and past quarters' earnings results have been so erratic that it's hard for analysts to accurately predict what the company will report this quarter. Last quarter, it posted a 1,850% earnings miss and the quarter before that it missed the mark by 143%. Stay away from this stock when it reports on Thursday.
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Image Sensing Systems Inc. (ISNS)
Image Sensing Systems Inc.
makes software-based detection systems for the intelligent transportation systems sector. The company is on the cutting edge of a budding industry, but the example of ISNS shows that just because a company is innovative doesn't mean it's profitable. The company is expected to post a 10-cent per share loss for the first quarter, compared with a gain of 13 cents per share in the first quarter of last year. This sent off warning sirens in my head as profits should never be decreasing and should only ever increase. Stay away from this play come its earnings report on Thursday.
Tree.Com Inc (TREE)
is a loan company that provides information and advice on different private and business loans. The company should be benefiting from increased consumer spending and growing private debt, but instead the company is losing money. Analysts are expecting a 29-cent per share loss when Tree.Com reports on Friday and sales growth is expected to be anemic. The lending industry is still not where it needs to be and I would be cautious with any kind of buying in this sector. TREE, however, is especially bad and I would recommend that you stay away from this stock right now.
VisionChina Media Inc. (VISN)
VisionChina Media Inc.
is an advertising company in China. The company operates TVs on subways and in public spaces that broadcast advertisements and commercials. There is obviously a growing consumer culture in China, but it hasn't elevated to the level that a company like VisionChina can make a major profit. The company is expected to post a loss for the first quarter, despite anticipated revenue growth of more than 40%. Its earnings results have also been erratic, with swings from positive surprises of 33% to negative surprises of more than 5,000% from one quarter to the next. Analysts have been getting more and more pessimistic on this stock and I give it a flat out D in Portfolio Grader. Stay away from this play when it reports on Friday.
>>To see these stocks in action, visit the
portfolio on Stockpickr.
As of this writing, Louis Navellier did not own a position in any of the stocks named here.
One of Wall Street's renowned growth investors, Louis Navellier is the editor of four investing newsletters: Emerging Growth (formerly known as MPT Review), Blue Chip Growth, Quantum Growth and Global Growth. His longest-running publication, Emerging Growth, has a track record of beating the market nearly 3 to 1. Navellier is the author of a BusinessWeek bestseller, "The Little Book That Makes You Rich," and the chairman and founder of Navellier & Associates, Inc.