Just like the games in “carny row” at the Boardwalk, the stock market also has its sucker bets. The difference is that while carny games are rigged against you, the market’s sucker bets are particularly deceiving because if enough suckers buy, a stock becomes a momentum play. You can make a lot of money if you ride the momentum in the right direction, but you can lose your shirt if you get caught without a chair when the music stops.
I’ve been skeptical of solar stocks from the beginning for three reasons. The first is that solar power is not a solution to the energy needs of the United States. It simply takes far too long for solar to pay for itself. One source shows that it would take an average of 14 years for solar to pay for itself … and that’s with government subsidies. A business that cannot sustain itself without government subsidies is a failed business in my eyes, and certainly not worth buying for long-term appreciation.
The second reason I’m skeptical is that a lot of these solar stocks were formed as the result of reverse mergers with Chinese companies, which lack transparency. Finally, these companies are cash sucks.
A lot of solar stocks are headed for zero, which means those low stock prices might make them appear to be worth taking a flyer on. I suggest you avoid them completely. JinkoSolar Holding (NYSE:JKS) just reported awful Q2 numbers, with a 45% decrease in revenue, margins falling from 25% to 8%, operational income down from $65 million to a loss of $13 million, and a loss of 55 cents per share this quarter compared to a 37-cent profit last year. The company’s working capital deficit increased. You don’t want to own a company with a working capital deficit.
This is the story you’ll see across the solar spectrum. LDK Solar (NYSE:LDK) lost $135 million vs. a $135 million profit. Revenues declined 74%. Gross margin was negative 66%. Five thousand jobs were cut, with more on the way.
Another area rife with sucker bets is what I’m calling “Internet 3.0.” These are a bunch of Internet-driven businesses that either do not have sustainable and profitable business models or are insanely overvalued. LinkedIn (NYSE:LNKD) trades at 170 times this year’s earnings. The company sits on $620 million in net cash, which is great, yet it’s not a terribly profitable venture, with net margins under 2% and virtually no insider holdings (0.1%).
Now, LinkedIn has something Internet bubble stocks didn’t have — actual earnings. Alas, a triple-digit multiple that has no alignment between management and shareholder interests is, to me, a sucker’s bet. Sell LNKD, and short it if you can with a tight stop.
Salesforce.com (NYSE:CRM) sells at 97 times this year’s estimates despite sporting only 28% annualized growth. There’s plenty of cash flow here to sustain this business, but trading at 30 times that free cash flow is insane. Its market cap is equal to that of Dell Computer (NASDAQ:DELL). Dell also has 15 times the net income of Salesforce during the past 10 years. The company has diluted its shares fivefold over the same period. It’s a solid business but outrageously overvalued.
Build-A-Bear Workshop (NYSE:BBW) is a great place and I take my kids there quite a bit. Alas, this has always been a one-trick circus bear. The company has lost money two of the past three years (the other being essentially breakeven), and is on track for a loss this year. Barring a stellar Q4, Build-A-Bear also will go free cash flow negative. Sell it. It has always been a fad stock.
I generated lots of controversy last year when I called IMAX (NASDAQ:IMAX) a fad stock, but I stick by that assertion — with a qualifier. The company has a fantastic product, but the revenue it generates from new installations will by necessity run out one day because movie screens are finite, not every screen is going to be converted and not every mall will order more than one. Then, IMAX will have to rely on its joint venture rev share with the studios for movies that run in IMAX theaters.
However, content is getting worse, box-office volume admissions have been declining for the past decade, and eventually audiences will rebel against the more expensive IMAX admission prices. In addition, there are a limited number of films that audiences will pay to see in IMAX (Batman, yes; Bridesmaids, no). Eventually this will implode. The time to short is not yet here, but it will be.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.