Danger! Three Stocks to Avoid in 2010
by Louis Basenese, Small Cap and Special Situations Expert
Thursday, December 10, 2009: Issue #1155
“Never lose money.”
That’s Warren Buffett’s No. 1 rule of investing. And after a 62% run-up for the S&P 500 from its March 9 low, I suggest you make it your top rule, too.
Why? Because I’ll bet you dollars to donuts that more than a few stocks – including ones in your portfolio – have overshot the mark and are destined to take a tumble in the year ahead.
And I’ve honed in on a chosen few that boast particularly terrible fundamentals.
If you own them, I suggest you take profits and switch to a short position. Whatever you do, just don’t buy them in 2010.
So without further ado, let’s get to this rather dubious list…
Ditch the Daily Rag Before It Dies
- Landmine #1: The New York Times (NYSE: NYT)
With circulations plummeting, newspapers are about to go the way of the dodo bird.
At the New York Times alone, advertising revenues are in the tank and crashed by 27% during the most recent quarter. And a sudden rebound in ad revenue is out of the question, too. The biggest ad buyers come from some of the hardest hit sectors – automobiles, entertainment, retail and real estate. Sectors that will also be the slowest to recover.
Of course, NYT management wants you to believe that its online business, coupled with aggressive cost-cutting, will save the day. Don’t count on it.
Although online advertising revenues keep posting solid gains, this still only accounts for less than 20% of NYT’s sales. And the company has already cut costs for years – a practice it can’t continue indefinitely. Not to mention, if your business is headed for virtual obscurity, it doesn’t matter how many expenses you eliminate.
Granted, some investors consider the company an iconic asset and thus believe it makes for an ideal takeover target. But takeover targets need to add value for potential suitors. And value is not something that NYT possesses. Heck, even if it did, it wouldn’t matter – the controlling family isn’t interested in selling it anyway.
In the end, profitable print media is dead. And so are the prospects for this stock. Yes, the share price has rocketed higher by 131% from the March 9 bottom, but the fundamentals certainly don’t justify it.
Lower Bills = Lower Profits… And the Big Boys Know It
- Landmine #2: Neutral Tandem, Inc. (Nasdaq: TNDM)
First, the good news: Sales and earnings for this maker of telecommunications switches increased by 44% and 80% respectively during the last quarter. Debt and credit isn’t an issue either. The company could easily pay off its liabilities and still have some cash on hand.
Now for the bad news: If we look past the headlines, there’s a problem. A big one…
In almost every single market that Neutral Tandem has entered since 2007, its average fees billed have been lower – a trend that management concedes will continue indefinitely. From the 10-Q, “We expect the average fee per billed minute to continue to decrease as we add new markets.”
Eventually, the music is going to stop. Neutral Tandem won’t be able to keep increasing sales volume fast enough to offset the decline in billing fees. And as a result, earnings will hit the skids.
There’s another red flag, too. In the past year, majority stakeholders that helped bring the company public in 2007 have ramped up their selling. With competition heating up, I’m convinced that an earnings hit is much nearer than most investors anticipate.
Like NYT, shares have risen strongly this year, jumping by as much as 91%. However, since the stock hit a peak in August, investors have wisely started selling. I expect the exodus to continue.
You’ll Need More Than a GPS to Find Profits in This Stock
- Landmine #3: Garmin Ltd. (Nasdaq: GRMN)
This leading manufacturer of GPS devices garners about 70% of its sales from the automotive market. Such a heavy concentration guarantees weak results for the foreseeable future.
And even if the automotive market miraculously rebounds, Garmin would still be in trouble. According to iSuppli, the market for handheld GPS devices has peaked. It expects negligible growth for Garmin and competitor TomTom through 2013.
The reason we can issue such an assessment on the stock is straightforward: GPS services are becoming a commodity. In fact, most smart phones now offer GPS services for free, which poses a serious danger to Garmin’s business.
Sure, Garmin is trying to break into the cell phone business with its nuvifone in order to stave off obsolescence. But it’s totally out of its league – a fact that unimpressive figures underscore. In the last quarter, sales dropped by 10%, while earnings plunged by 37%. Management expects the weakness to continue, with prices for its products to falter by 15% to 20% this year.
In addition, a weak consumer-spending environment only exacerbates Garmin’s woes, as does competition from the 800-lb gorilla Google (Nasdaq: GOOG).
At this point, the best Garmin can do is try to generate as much cash as possible as its core business enters the maturity stage, before it quickly declines and dies thereafter. And with shares up 79% since the March 9 bottom, there’s plenty of room to fall.
Your job now is to warn your family, friends and co-workers about these landmine stocks. Come next Christmas, the advice could net you some primo gifts of gratitude.
Good investing,
Louis Basenese
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One Response to “Danger! Three Stocks to Avoid in 2010”
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In addition to being the foremost expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
I went ahead and shorted NYT,TNDM & GRMN. They are all up, NYT especially. I’m in for the long haul as maybe it’s the market rally that has taken them on a ride. Any comments, Lou?
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