This week’s Danger Zone pick features a consumer goods company with inflated earnings growth and an unrealistic valuation.
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Valeant has been guilty of some dubious assertions in its attempts to defend itself from claims that its business model is nothing more than a rollup scheme and that its stock is overvalued.
USM's profits, margins, and return on invested capital are all in decline, and its revenues have been stagnant for a number of years. In addition, reported earnings per share conceal the company’s growing profit losses.
Latin American e-commerce is a high growth area, but that does not make MELI a good investment. Even if it staves off the competition and keeps growing rapidly, the stock is already priced for significant growth.
A high quality smartphone from Amazon that undercuts higher-priced competitors could mean more serious trouble for Apple’s iPhone and the company's declining profit margins.
OLN is a classic value trap. With a P/E of 13, the stock may appear cheap, but a closer look reveals earnings quality issues and major growth is still priced into its valuation.
The true sign of a bubble stock is when investors see only opportunity without factoring in any of the risk, which is exactly what’s happened with NFLX. With this European expansion, bulls are dreaming of revenue growth and a global streaming giant without factoring in the significant hurdles NFLX faces and the high costs it will incur.
At best, Rydex offers a more expensive, lower quality portfolio than what investors can get from other ETFs or mutual funds. At worst, Rydex poses significant risk of diminishing investors’ wealth.
This Midwestern savings and mortgage bank has been consistently unprofitable since the financial crisis, yet accounting distortions allowed the company to report a sizeable profit last year.
Insiders are getting out of this stock, and you should too. LNKD has slowing growth, low profits, and little market momentum left to prop up the price.
In November of last year, Netflix (NFLX: ~$355/share) landed in the Danger Zone after rising 363% year-to-date on promising quarterly results and much media hype. The stock rose rapidly for a while after our pick but has come back down nearly 20% in the past month.
Value investing is a tried and tested approach that has worked wonders for investors in the past. However, in today's world, executing this strategy can be a daunting task, given the complexity of the annual reports that companies file. Even professional investors have a tough time understanding the profitability and valuation of companies due to the lengthy and convoluted filings they receive. With stocks becoming more volatile and earnings estimates less precise, investors could be misled into thinking they're making a wise investment when, in fact, there's another side to the coin they've not seen.
DNKN’s illusory growth in accounting earnings has driven the stock up nearly 40% while the S&P 500 is up only about 20% over the past year. Our diligence reveals that while reported earnings are up, DNKN’s economic earnings are in decline. Future growth expectations are overblown as well because the company’s plans to expand outside of the Northeast pit it against formidable, entrenched competitors.