5 Stocks That Could Drop
NEW YORK (TheStreet) -- First, a caveat: Predicting the future performance of stocks is -- as any investor from Buffett to Cohen will attest -- an imperfect science. It's all the more so when incorporating the opinions of analysts.
That said, an argument can always be made that a handful of stocks are poised to plummet -- some by more than 10% to 20%, others potentially as much as 50%. Are these iron-clad predictions? Hardly. Still, according to a number of investment managers we surveyed, the following stocks have serious issues. Read on for five stocks that some market watchers think could be trading on thin ice....
NetSuite (N)
Predicted Percentage Drop: Potentially 20%
Time Period: Next three to six months
Number of Analysts:
22
Average Recommendation:
Hold
Market Cap:
$1.3 billion
Trailing 12-Month Operating Margin:
-15.8%
Trailing 12-Month Revenue:
$176 million
Why NetSuite Stock Could Plummet:
"NetSuite has been doing pretty well recently, but might be on a look out for a correction," said Brian Shepardson, co-portfolio manager of the James Market Neutral Fund. "Kind of the reason it ran up so much in my view is that they do cloud computing. If you remember not so long ago,
Hewlett-Packard
(HPQ) - Get Report
and
IBM
(IBM) - Get Report
were in a bidding war for 3PAR that really brought the cloud computing thoughts and issues to the investing forefront. But outside of that, the big questions remain that if those two were bidding for 3PAR
and went so far above and beyond the true value of what the company was, why didn't they stop and maybe look at one of their competitors who also does cloud computing?
"NetSuite may have run up artificially
on some of the 3PAR news, but at the same time has also had negative earnings and therefore no P/E, return on assets of -11%; and they don't pay a dividend. Price-to-book is around 12.5. So maybe it's just one of those stocks that ran up because of some good news of another company, and not necessarily because of their own performance.
"It's currently around $19. If it fell to $16 in three to six months, I wouldn't be surprised; then again, maybe down to $12, where it was just back in July. I would suggest investors either begin trimming back on their positions or getting out of it all together."
Life Time Fitness (LTM) - Get Report
Predicted Percentage Drop: Potentially 40%
Possible Time Period: Next 12 months
Number of Analysts:
12
Average Recommendation:
Outperform
Stock Price/Earnings Ratio vs. Industry's:
67.11%
Market Cap:
$1.5 billion
Trailing 12-Month Operating Margin:
18.4%
Trailing 12-Month Revenue:
$892.87 million
Why Life Time Fitness Stock Could Plummet:
"A stock that we're short is Life Time Fitness," said Harry Rady, chief investment officer and portfolio manager of Rady Asset Management. "The fitness business has been fraught with difficulties for decades. It's simply a terrible, cyclical, highly competitive business. It's almost like the airline business, where companies literally risk going bankrupt every five to seven years.
"Life Time Fitness has moved up from $7 to $43 over 20 months. We established our short position in the high $30's to low $40's. The stock currently trades around $36, but we think there's still significant downside for Life Time Fitness. There's so much wreckage on the highway in this industry from companies gone bankrupt that we see no reason that the same scenario won't occur again.
"At 18X earnings, the stock's gone up 6X over a very short period of time and if that's not enough, the balance sheet is ugly, with 75% debt/equity. In addition, their operating costs are very high because of the size of their facilities, which requires more staff, which means more overhead in a highly competitive business. They rely on charging a premium price (and continually raising prices) in a pure commodity business with price inelasticity.
"At $7, the Street overshot the mark on the downside; but at $43, I think it's clear the Street overshot the upside. At $36, we think it's extremely vulnerable to a variety of variables. It could easily move down to the low-to mid $20s in the next 12 months but the timing is difficult to predict.
"We're short the stock. I certainly can't tell investors what to do, but I can tell them what I've done and where our team sees opportunity."
Barnes & Noble (BKS) - Get Report
Predicted Percentage Drop: Roughly 25%
Time Period: Next three to six months
Number of Analysts:
6
Average Recommendation:
Hold
Market Cap:
$859.4 million
Trailing 12-Month Operating Margin:
2.7%
Trailing 12-Month Revenue:
$6.05 billion
Why Barnes & Noble Stock Could Plummet:
"There's a couple of different things," said Brian Shepardson, co-portfolio manager of the James Market Neutral Fund. "On the big-picture issue, I think they're facing a lot of competition from
Amazon.com
(AMZN) - Get Report
and
Wal-Mart
(WMT) - Get Report
... heavily in that area, too, so those are the two big places where we can purchase books, per say -- like a hardcopy or paperback version. They're also coming up against the iPads, the Kindles of the world that are bringing out content in a different format. So that's kind of the rationale behind it. I don't know if it'll be to this extent, but it kind of reminds of -- for a while
Blockbuster
-- if you wanted to rent a movie, that was the big place that you would go to. And then came along
Netflix
(NFLX) - Get Report
and delivering movies over the Internet -- a different format without having to visit that physical store.
"Just looking at what we saw recently, I would say in the short-term, I could see it dropping back to $12, just where it was in July -- maybe down to $10.77; that was its low back in 2008. I don't see why it can't touch there just in the immediate future (three to six months), then trickle lower than that."
"Right now their earnings -- they're having a difficult time with their earnings. They're in a negative position, so they actually have a negative P/E ratio; their return on assets is only around 1%. They're paying a dividend, but their payout ratio is a 150%; so either they're going to have to find a way to raise their income or else cut back on that dividend. It's not just the story behind it; there are also some fundamentals within the company that we're looking at."
Salesforce.com (CRM) - Get Report
Predicted Percentage Drop: Up to 50%
Time Period: Next 12 months
Number of Analysts:
39
Average Recommendation:
Outperform
Stock Price/Earnings Ratio vs. Industry's:
927%
Market Cap:
$14.5 billion
Trailing 12-Month Operating Margin:
8.1%
Trailing 12-Month Revenue:
$1.46 billion
Why Salesforce.com Stock Could Plummet:
"From a valuation perspective, all the cloud computing stocks are vulnerable," said Harry Rady, chief investment officer and portfolio manager of Rady Asset Management. "A number of these stocks are trading at a hundred times earnings, so take your pick -- Salesforce.com,
VMware
(VMW) - Get Report
, the whole space has gotten significantly ahead of itself and is now priced for perfection."
"I look at them more as a basket. Salesforce is trading at 180 times trailing earnings and 90 times forward earnings and if that wasn't enough we see their earnings as being very low quality. We believe that their EPS is inflated by aggressive accounting policies whereby, as an example, they capitalize certain expenses that many would argue should simply be expensed. VMware is trading at 105 times trailing earnings and 51 times forward earnings. I will concede that it is a well-run business in the sweet spot of the technological upgrade cycle, but their valuations are ridiculous." (continue to next page for more on Salesforce and VMWare)
VMware
Predicted Percentage Drop: Up to 50%
Time Period: Next 12 months
Number of Analysts:
34
Average Recommendation:
Hold
Stock Price/Earnings Ratio vs. Industry's:
434%
Market Cap:
$31.8 billion
Trailing 12-Month Operating Margin:
14%
Trailing 12-Month Revenue:
$2.63 billion
Why VMware Stock Could Plummet (continued from previous page):
"Fundamentally they are doing very well," Rady continued. "But what you have to consider is that product cycles are very short in this business and companies can be leapfrogged technologically almost overnight, so they're only as good as their next product. Given the valuation, if they stumble the stock could get cut in half. So expectations are that they just keep executing and keep putting out perfect product after perfect product; and that may happen -- but we think it's already more than discounted in the price of the stock."
"VMWare is a great company with 20% long-term growth rates. Well-run companies with growth rates like that should trade around 20-25 times earnings. So in our opinion, the stock could easily drop by 50% from here, if perfection isn't achieved."
"The same rationale applies to Salesforce.com. It's growing at about 25%, so perhaps the company should trade at 25, maybe even 30 times earnings, which makes the stock worth 50% less than where it's trading now.
-- Written by Andrea Tse in New York.
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